Municipalization and Subsidized Utility Competition
The Taxpayers' Perspective

By Elaine and Richard Davis

Leveling the playing field may be an overused phrase, but it can sometimes succinctly describe a complicated situation. As the following Cal-Tax research bulletin lays out in some detail, the unlevel playing field involved in competition between municipalities and investor-owned utilities in telecommunications and energy markets should concern all taxpayers. This inequity has various causes: taxpayer subsidies enjoyed by a municipal utility, a municipality's power to condemn privately owned facilities or to commandeer their transmission lines, and a municipality's access to preferential loans and low-price federal power.

Municipal utilities in California have been part of the landscape since the 19th century, and they are here to stay. What's new on the scene is competition to provide utility services that heretofore have been provided by monopolies in the private sector, such as the major investor-owned utilities overseen by the California Public Utilities Commission, or by monopolies in the public sector, cities and municipal utility districts overseen by elected boards. Both Congress and the California Legislature have enacted laws that encourage, even mandate, competition between service providers. The questions raised in this bulletin highlight taxpayer concerns about government's involvement in that competition.
- Editor

Findings:

  • Subsidies for municipal utilities, in the form of tax exemptions, preferential power purchasing, low-interest government loans, loan guarantees, and tax-exempt bond financing, nationally cost taxpayers more than $11 billion annually.
  • In California, subsidies to municipal electric utilities are estimated at about $1 billion a year.
  • Government-owned utilities are often less-efficient and higher-cost providers, but their tax advantages allow them to offer lower-priced services than private counterparts.
  • As energy and telecommunications services become competitive, municipalities that operate their own utilities face a serious conflict of interest, because they can and do regulate their competitors.
  • Many California local agencies are positioning to take over provision of electric and telecommunications services from private utilities or to use their subsidies, preferences and regulatory powers to compete against private utility companies.

In the wake of recent actions by Congress deregulating the electric power, telecommunications and cable industries, government-owned utilities are using taxpayer subsidies and special preferences to preempt marketplace competition. Municipalization is the inelegant term describing attempts by cities and local utility districts to seize markets from private, investor-owned systems, such as when a local agency condemns private utility property and uses that property to form its own utility. Competition by taxpayer-subsidized municipal utilities is also threatening private utilities. These attempts threaten competitive restructuring of these industries.

Successful deregulation and restructuring ultimately will allow customers to choose their local and long distance telephone, cable and electric power providers and allow businesses in these industries to do what businesses in other sectors have always done: Compete on the basis of established market criteria - price, quality, service, and innovation. It will not happen overnight. The details are still being worked out. Indeed, some of these "details" represent issues so major that their resolution is as important to the success of restructuring as the original congressional actions.

As policymakers work to implement the transition to utility competition, it is instructive to examine the taxpayer-funded subsidies currently enjoyed by government-owned and cooperative utilities, which allow them to offer significantly lower rates than their private competitors. These subsidies and preferences have been examined at length for the electric industry. The findings of those studies are also applicable to other utilities, such as telecommunications, which are beginning to face similar public-sector competition.



Elaine Davis and Richard Davis are principals in The Simeon Partnership, an economic and public policy consulting firm in Bainbridge Island, WA. Authors of "Competing for a Change, Market Approaches to State Government," and numerous other publications on the importance of competition to government efficiency, the Davises have practiced and researched public policy for more than 20 years.

Cal-Tax Director of Research Stephen Kroes contributed to this report.

From large cities, like Los Angeles and San Francisco, to rural agencies, like the Modesto Irrigation District, local governments in California are increasingly looking at entering the utility business as a source of new revenue. Those that already have municipal utilities are examining expansion to provide new services or to sell existing services outside of their current boundaries.

As government agencies expand their presence in these newly competitive markets, the inefficient nature of government preferences and subsidies will be accentuated.

This report specifically examines the electric and telecommunications industries. Deregulation of the natural gas industry, however, has also prompted many of the same taxpayer concerns, particularly regarding the threat of municipalization and subsidized government competition with investor-owned utilities.

As government agencies expand their presence in these newly competitive markets, the inefficient nature of government preferences and subsidies will be accentuated.

Commentary: Municipalization Holds Concern for Taxpayers

Remember when you wanted government to be more "business-like?" To deliver the goods at a reasonable price, of consistent quality, on time? To pay employees competitive, not exorbitant, wages? And to be responsive to the wishes of the customer?

Public administrators agreed, with a number of California municipalities leading the way in privatization, public-private partnerships, even toll roads. In many ways, California is the birthplace of entrepreneurial, reinvented government.

Unfortunately, California is also home to the dark side of reinventing government - municipalization. Municipalization turns privatization on its head - with government preparing to compete aggressively with private business, even if it means using its financial subsidies, regulatory authorities and powers of condemnation to drive out private sector competition. This is not government becoming more business-like; it's government misconstruing its purpose.

Government can be more business-like. It cannot, and should not, be in the business of competing with the private sector. The efficiencies of privatization are derived from free-market competition. Consumers, speaking with one voice, send a clear and unambiguous signal to businesses wanting to make a profit: Offer a better product or service at a competitive price, or we'll take our business elsewhere.

Government marches to a different beat. Politicians listen to many voices and respond to different incentives. As a result, municipalization efforts are destined to be noncompetitive, leaving taxpayers to pick up the tab. Consider the following:

1. Political governance. Government operations are inherently political. Political decisions involve consensus and compromise, checks and balances. The process, designed to thwart despotism, is inefficient. As privatization advocates argue, government should "steer, not row." The rapid-response required to survive in competitive markets cannot occur when each decision must be balanced against public opinion surveys, campaign and re-election pressures, constituent second-guessing and legislative vote-trading.

2. Labor influence. Government personnel policies reflect the influence of public employee unions. Decisions involving downsizing, employee reassignment, salaries and benefits occur in public forums and are subject to intense employee lobbying. Public employees are also voters with well-financed campaign funds. In California, as Cal-Tax has previously reported, public employees receive as much as 20 percent more in wages than their private sector counterparts, with the difference increasing to nearly one-third when benefits are considered.

3. The survival imperative. Government rarely abandons failed approaches or institutions. Wherever the public sector dominates a marketplace, it develops a constituency (or at least a dependent audience) that relies on the continued government presence for services, employment, real estate occupancy, or cash flow. From military bases to public schools, from prisons to welfare offices, government operations don't downsize easily. Whatever the merits of the original decision to enter the market, the survival imperative takes root quickly.

4. The social agenda. Government operations cannot be divorced easily from the larger public policy agenda embraced by lawmakers and public administrators. Hence, energy utilities promote conservation and consumers pay for their efforts; garbage collection is coupled with recycling programs; phone bills subsidize emergency response services; and cable television stations cover city council meetings. The efforts can be costly, but the costs can often be hidden from the taxpayers. The more critical the service, the more likely its provision will be tied to a social agenda.

5. Creative accounting. Municipalization offers new revenue sources to cash-strapped governments. Many cities receive large transfers of cash from their utilities to their general funds. Even if the law required that utility revenues only support utility operations, creative accounting can inflate charges for indirect overhead costs in order to provide additional funds for general government services.

6. High costs. Subsidies mask higher costs. In a competitive market, the higher costs associated with mandated social policies, inefficiency, or political pressure might be exposed and consumers could take their business elsewhere. Taxpayers served by a government monopoly lack such options. Without the subsidies, the higher costs would be visible and countervailing political action could be taken. For many government activities, however, subsidies are available that disguise true costs and allow below-market prices to be charged to the consumer.

- Elaine and Richard Davis

Electricity

Nationally, and in California, investor-owned utilities account for about 75 percent of the electric utility industry, with government utilities, like cities, PUDs (public utility districts) and cooperatives, making up the remaining 25 percent. The tax exemptions, subsidies, and costs of preferential treatment enjoyed by government-owned utilities are paid for by the vast majority of taxpayers who receive few of the resulting advantages.

These subsidies are substantial. In a 1994 study done for the Edison Electric Institute, Putnam, Hayes & Bartlett, Inc. (PH&B) estimated that these subsidies cost nationwide more than $11 billion in 1992. The major burden was carried by the federal government, whose various subsidies totaled $8.4 billion that year - $4.8 billion in taxes and $3.6 billion in foregone federal utility revenue. Local governments lost another $2.7 billion in taxes. Based on its share of public power nationally - estimated to be about 12 percent - California represents nearly $770 million of these revenue losses to the federal government and more than $247 million in state and local government revenues that were not collected.

An examination of the subsidies provided to government utilities is instructive. According to PH&B, they include:

  • Exemption from federal and state income taxes;
  • Exemption from other taxes (including property, gross receipts, and excise taxes);
  • The ability to issue tax-exempt debt securities;
  • Access to low-interest government loans and loan guarantees; and,
  • Preferential access to low-price federal power.
Joseph Graves, a PH&B director, summarizes the public policy issue relative to taxpayer-subsidized utilities:

" ... government subsidies to public utilities and coops have long outlived their usefulness and, in fact, distort the power market in ways that directly harm the vast majority of electricity customers and work to reduce economic efficiency."

Modesto Irrigation District attempts to overpower PG&E

Modesto Irrigation District (MID) plans to compete more aggressively for customers served historically by Pacific Gas and Electric (PG&E). Over the next five years MID, with the help of its own federal, state and local subsidies and wholesale power producer, Destec Power Services, plans to grow its customer base and revenues about five percent per year.

MID wants to buy lower-priced, wholesale power from Destec's co-generation facilities, move it across PG&E transmission lines, and then compete with PG&E for retail customers. Destec has standing agreements to transmit power across PG&E lines to its other wholesale customers. Destec, however, has not competed with PG&E for retail sales.

The California Public Utilities Commission has instructed PG&E to work out a deal with MID. A decision should be reached in April.

In the meantime, the city of Pittsburg, California, is waiting to receive power through this arrangement. MID has two additional signed franchise agreements with the towns of Ripon and Escalon and is in negotiations with two other towns, Riverbank and Oakdale.

The 1996 Annual Report of President Clinton's Council of Economic Advisers (CEA) anticipated the subsidy problem. Referring specifically to energy deregulation, CEA said,

"... competition will be distorted if producers are given selective privileges, or subjected to selective obligations imposed to further even legitimate social goals. ... As competition grows, increasing distortions may result from some entities having access to special privileges such as federally tax-exempt bonds or other preferential treatment."



Municipalization turns privatization on its head - with government preparing to compete aggressively with private business, even if it means using its financial subsidies, regulatory authorities and powers of condemnation to drive out private sector competition.
Free-market advocates like the American Legislative Exchange Council (ALEC), an association of state legislators, take a similar position:

"...subsidies provided to government-owned electric utilities... contradict federal policies designed to further competition in electricity supply. Clearly, in order to maximize the benefits of a competitive electricity market, federal policies which grant subsidies to electricity suppliers must be reformed."
To place the various subsidies in perspective, the PH&B study estimates that in order for the average subsidized government utility to pay the same taxes and interest as a private utility, it would need to increase its rates by 16 to 17 percent.

Better yet, don't
'show me'

A Missouri state statute in 1994 was revised to preempt public takeovers of private, investor-owned utilities. In Section 71.525 of state statute affecting cities, towns and villages the revised language states, "...no city, town or village may condemn the property of a public utility. ... if such property is used or useful in providing utility services and the city, town or village seeking to condemn such property, directly or indirectly, will use or proposes to use the property for the same purposes, or a purpose substantially similar to the purpose that the property is being used by the public utility or rural electric cooperative."

This measure was intended to assure that government was not competing unfairly.

Government utility advocates admit that their lower rates are partially due to subsidies. They assert, however, that about 60 percent of the difference exists because government utilities operate more efficiently. The American Public Power Association (APPA) points to a study conducted for them that reviewed the PH&B methodology. Based simply on the study's conclusion that subsidies only represent a portion of the rate difference between government and private utilities, APPA concluded that the rest of the difference must be due to better operational performance by government utilities.

If their assertions were true, government power providers would constitute a novel exception to the general rule of monopolies. Even pro-government advocates, David Osborne and Ted Gaebler, authors of Reinventing Government and founders of "entrepreneurial government," do not promote government-owned business monopolies. At best, their work suggests, such monopolies may equal the performance of their private sector counterparts.

The best way to demonstrate efficiency is fair market competition. If APPA is right, municipal utilities should be able to successfully compete without their subsidies.

Palm Springs offers nothing for something

In a now failed attempt, Palm Springs, California proposed to install meters at each home and business in its jurisdiction, basically intercepting the electric power provided by Southern California Edison (SCE). Called "muni-lite," city officials said that new federal laws allowed this unorthodox arrangement. They claimed unsuccessfully that federal laws gave the city the authority to purchase wholesale electricity from other suppliers and to transmit it across SCE lines through the city meters to the city's new retail customers. The Federal Energy Regulatory Commission ruled against the city, calling the proposal a "sham wholesale transaction."

Since that determination, the city has embarked on another approach, establishing what it calls a "virtual utility," which will involve a partnership with Portland General to provide power which the city wants to transmit over SCE lines to compete against SCE for local customers.

The competitive edge that government subsidies allow municipal utility providers is substantial and is increasingly attractive to major power users. The potential for some of the nation's largest industrial power users, enticed by lower rates, to switch to government-owned utilities, or to threaten to do so, exacerbates the problem. Following the expansion of wholesale competition among electric utilities, the CEA said:

"Pressure is growing to allow retail competition as well. ... This pressure comes mainly from large customers, who, among other things, can credibly threaten to bypass their local utility by generating their own electricity using small natural gas plants, or through municipalization." (emphasis added).
In the context cited by CEA, municipalization was considered an option primarily as a consequence of the price distortions resulting from subsidies and tax breaks.

A bias toward municipalized services is evident in California and around the country, and several examples are highlighted in this paper. Moves like those by Palm Springs, Modesto Irrigation District and others jeopardize private utilities, their investors, and taxpayers.

Taxpayers are harmed when a taxable economic activity is taken over by government and taken out of the tax base, leaving a revenue loss that increases pressure for tax increases. Such actions, especially when municipal utilities selectively target large customers, can leave behind a larger bill to be paid by the private utility's remaining customers - small businesses and residential customers. With retail competition following closely on the heels of wholesale competition, these remaining customers would eventually figure out how to take their business to government utilities in order to receive subsidized rates.

"...subsidies provided to government-owned electric utilities... contradict federal policies designed to further competition in electricity supply."

Is there a Santa Claus, Virginia?

In a case similar to Palm Springs, Falls Church, Virginia contemplated its own "muni-lite" plan. Nearby Virginia Power said, "It is without precedent in Virginia for a municipality to suggest that it can take over a utility's service area and its customers by creating an entity that will provide no service, will own nothing more than the meters, and will do nothing more than bill customers, if it will do that." (Virginia State Corporation Commission petition, filed March 13, 1995)

Left unabated and carried to its extreme, these subsidies could eventually spell the end of privately delivered electricity. Competition solely between government utilities is not the kind of competition envisioned by Congress. Congress anticipated that competition would result in lower costs and eventually in lower consumer prices. Government inefficiencies can be masked by taxpayer subsidies, however, so that they can charge low rates, even though they have higher operating costs.

A 1996 audit of the Los Angeles Department of Water and Power (DWP) illustrates the point. The audit concluded that "DWP's electric costs exceed the average costs of each of three comparison panels - California utilities, urban investor-owned utilities (IOUs), and publicly owned utilities."

"It is without precedent... for a municipality to suggest that it can take over a utility's service area and its customers by creating an entity that will provide no service, will own nothing more than the meters, and will do nothing more than bill customers, if it will do that."
Even so, according to the audit, DWP's "average residential electric rates were 12.5 percent lower than California utilities," and its commercial rates were 14 percent lower.

The audit concludes, "The inconsistency between having low rates and high costs is largely explained by DWP's favorable tax status and its low cost [subsidized] generation mix."

The difference between costs and prices is a substantial tab that is being picked up by taxpayers.

The difference between costs and prices is a substantial tab that is being picked up by taxpayers.

Electric power industry originally considered a natural monopoly

Government has played a dominant role in the electric power industry since the lights were first turned on late in the 19th Century. Primarily because electrical power generation and distribution have been considered "natural monopolies," government has closely regulated private electric companies, and it has owned and operated some municipal and rural systems. Typically, natural monopolies have been associated with situations where the capital investment required to do a project is so great that large market areas are required for the project to be economically viable. In addition to electricity, natural monopolies have historically been considered to exist in telecommunications, gas, water and sewer systems, and more recently, in cable television.

Regulations Favor Government-Owned Utilities

Government programs and regulations at the federal and state levels have routinely favored government-owned utilities, especially in the West. For example, whereas the investments and rate-setting of private utilities require review and approval from a state utility commission, government-owned utilities report only to their individual local governing boards. Not only is government utility decision-making more independent, but their revenues are not subject to federal taxation, their capital projects are eligible for low-cost federal loan programs, and their power is often provided at below-market prices from federally owned power facilities. These preferential policies and practices, defensible perhaps in an earlier time, result in unfair advantages in a competitive environment.

More Recently

Many analysts cite the 1978 Public Utility Regulatory Policies Act (PURPA) as the first of several regulatory events that spurred a move for the electric utility industry away from a system of regulated monopolies. In response to energy shortages during the 1970s, PURPA required regulated utilities to purchase power from non-utility producers of renewable energy resources. Electric energy from alternative sources, like windmills, solar collectors, and cogeneration facilities, became popular experiments throughout the country. While somewhat successful in promoting development of these alternative energy sources, PURPA, more importantly, played a major role in pushing the electric power industry toward market competition. Once independently generated energy was successfully integrated into the electrical transmission grid, pressure increased to open access to transmission lines, so that all energy producers could sell their wholesale power to the highest bidder.

Energy Policy Act of 1992

The Energy Policy Act of 1992 ("Act") was the result. Under the Act, the Federal Energy Regulatory Commission (FERC) has the authority to force utilities to open their transmission lines, allowing competitors (private and government-owned), as well as non-utility energy producers, to move their power to their wholesale customers. Called "wholesale wheeling," this allows producers to compete for sales on the wholesale market. In April 1996, in action consistent with the direction already established by the California Public Utilities Commission (CPUC), FERC adopted rules calling on electric utilities to open transmission lines to competitors.

Competition and the 1992 Act dramatically alter the rules under which electric utilities have operated for most of this century. In fact, this paradigm shift calls into question the propriety of allowing current subsidies to apply when government utilities compete against private utilities, selling power outside their traditional natural monopoly boundaries.

Telecommunications

The telecommunications industry is also moving toward market competition, and at a pace even more rapid than electric utilities. Following passage of the Telecommunications Act of 1996 by Congress, the move is on by long distance, cable, satellite and wireless telecommunications companies to compete for the long-awaited $9 billion local market that has, until now, been the sole domain of the Baby Bells and other regional telephone companies. Regional phone companies will also be allowed to compete reciprocally in long distance markets.

In telecommunications, as in energy deregulation, there is considerable disagreement about how the various details will be finalized. Opening of these markets has telephone companies evaluating cable TV service, cable TV providers eyeing telecommunications, and wireless telecommunications services with designs on both.

Increasingly, local governments are working to enter the telecommunications business. An article in the March 1997 issue of Government Technology describes Colorado-based International Communications Services (ICS) "promoting the concept of municipal ownership of telecommunications infrastructure." According to the article, ICS promotes municipalization as a way to provide leading-edge services to residents at a low cost, while controlling the right-of-way and generating non-tax revenue.

If municipalities compete in this market (and there is nothing currently preventing them from doing so), the same tax exemptions and financing preferences, historically available to government electric utilities, would apply, with similar competitiveness problems.

Many cities already provide one or more utility services, like electricity, water, sewer, or garbage; it would be easy to add one more service. For example, the city of Los Angeles has noted that its existing billing and customer information systems for power service could allow the city to enter the telecommunications business more easily.

In the case of older cities, many of the more traditional public services are already being fully utilized as revenue producers. Cities, public utility districts, even rural utility cooperatives, originally established to electrify rural farms throughout America, see in telecommunications a springboard of opportunity, with potential for additional revenue growth well into the foreseeable future.

The issue of who provides advanced telecommunications services is important. Several municipalities are evaluating whether to build, own, and operate their own full-service telecommunications utilities, either by themselves or in partnership with private sector firms.

Media Connections Group (MCG), a private consulting firm, was engaged by the city of Milpitas, California, to analyze the financial viability of such an idea. The city was particularly interested in the possibility of being a full service telecommunications provider and competing aggressively against the private sector. MCG recommended against the idea. Based on assumptions that "...were aggressively chosen to drive the model toward financial viability," MCG's evaluation concluded that "...such a network could not be operated successfully in a competitive environment by a commercial partner (of the city's) unless very aggressive penetration levels are assumed for core telephone and/or cable services. Before it accepts a proposal to partner in such a venture, the city should investigate the operating assumptions carefully."

Located in the northern part of the Silicon Valley, Milpitas prides itself on its quality of life, its highly educated population, and the forward-looking character of its general economy and business climate. In 1994, Pacific Telesis, the regional Bell operating company serving most of California, had proposed to lay new fiber optic/coaxial cable throughout the city, making it a model city for cutting-edge telecommunications technology. "We believed we were offering the community a tremendous opportunity to be a world leader," says Don Lehman of Pacific Telesis.

When city permit approvals were not forthcoming, Pacific Bell abandoned that plan and moved on to make a similar offer to invest in a more receptive community where it is now building the system.

"From the perspective of a community's economic competitiveness, we are concerned that there will be islands of technology," says Norm Smith of AT&T. With the speed at which technology is changing, communities that purchase their own systems are likely to have obsolete equipment the day they turn their systems on. Firms like AT&T and Pacific Bell, whose primary business is providing telecommunications services, are more likely to stay current with state-of-the-art technology, he says. Many businesses and state governments that tried owning and operating their own systems in the late 1970s and 1980s have since abandoned them. One example can be found in California state government:













These preferential policies and practices, defensible perhaps in an earlier time, result in unfair advantages in a competitive environment.
In December 1996, the California Department of Information Technology published a strategic plan for a new "California Integrated Information Network" - a new telecommunications system to be owned and operated by the private sector, replacing the existing state-owned network, which has been operating at a financial loss. Among the reasons stated for divesting the state-owned system are:

  • "Owning and operating telecommunications networks are neither core competencies nor core responsibilities of the state,"
  • "State-owned network infrastructures have proven costly and cannot keep pace with the rapid developments in telecommunications technology," and
  • "The inability of CALNET to meet, at competitive cost, the service requirements of... state agencies."
For government agencies and businesses alike, the important question to be answered is: "What business are we in?"

Taxpayers and Other Government Agencies at Risk

If government utilities are successful in expanding their customer base in the new era of competition, taxpayers and other government agencies will lose. If a city, for example, municipalizes the assets of a private utility, the county, school districts, and special districts that formerly received property tax revenues from those assets will lose revenue when those assets are converted to non-taxpaying government property.

The state loses revenues when activity that formerly was subject to income taxes becomes a tax-exempt government activity, either through municipalization or the extension of government utility services to customers previously served by a private utility.

Finally, taxpayers lose because subsidies and tax exemptions cost money. Reductions in tax collections by state and local agencies cause increased pressure for tax increases.

Although a few customers may benefit by purchasing services from an expanding government utility, that benefit is paid for by many other individuals and agencies.

Distorted Competition

The idea of government competing aggressively with the private sector is not unique to Milpitas: San Diego County recently provided a striking example of unfair government competition with the private sector by considering using its access to low-cost capital to compete and displace private garbage haulers. The county-owned garbage utility was losing money, due to an unsuccessful waste-to-energy facility. To repair its flagging financials, it proposed that a special assessment be charged to all county residents, suggesting that the resulting revenue could be used to lower garbage rates and to undercut competing private garbage haulers.

Multiple city utility services are not unusual: As a page one story in The Wall Street Journal described, however, mischief can ensue when government expands its range of utility services. The Journal's June 3, 1996 edition carried the headline: "Power Play, Little Town Becomes First Municipality Sued by U.S. for Antitrust." The article cited the case of a real estate developer told by the city of Stilwell, Oklahoma, that "if he didn't buy the town's electricity, they would deny him water and sewer service, which he couldn't buy elsewhere." The city, which relies on utility revenues to fund its general services, was exercising its monopoly clout to prevent the developer from purchasing his electricity from another local electric co-op. In doing so, it fell afoul of federal antitrust law barring sellers from using monopoly power over one product to force purchase of another.

Closer to home, the city of Anaheim is requiring any utility wishing to lay new fiber optic cable not only to obtain permit approval and pay permit fees, but to lay several lines of fiber optic cable intended for the city's future use and probable future competition.

Conclusion

Rather than be involved as a player, government's more appropriate role is one of referee. In its 1996 annual report, President Clinton's Council of Economic Advisors (CEA) advised that:

"With so much uncertainty about the shape of the communications networks of the future and with significant potential for competition, the best course is to leave their evolution to be determined by the private sector."
The same wisdom applies no less to electric utilities. In a prescient 1988 discussion of the use of federal tax-exempt financing to support government takeovers of investor-owned utilities, Dennis Zimmerman of the Congressional Research Service questions the continued justification for government provision of power:

"In economic terms, electric and gas utility services do not possess the characteristics that require provision by the public sector. ... The subjective judgment of taxpayers in a state or a local region may be that public provision of electricity is justified. This does not, however, necessarily imply that it makes sense for the federal government to tax its taxpayers [through federal loan programs and tax exemptions] to help pay for this state or local decision."
"Owning and operating telecommunications networks are neither core competencies nor core responsibilities of the state"
As utility deregulation enters its next phase of sorting out the rules for the retail side of the industry, states and their utility commissions will be responsible for building an important piece of the foundation for future competition. Deliberations should consider the current roles and authorities of publicly elected leaders and their appointed officials and how their ability to regulate their competitors, to tax and subsidize, and to condemn utility property through eminent domain affects competition with the private sector.

As the rest of the world moves more and more to privatization and divestiture of state-owned means of production, it is difficult to understand why policymakers would permit California's local governments to municipalize private assets and take business away from the private sector.

As the rest of the world moves more and more to privatization, it is difficult to understand why policymakers would permit California's local governments to municipalize private assets and take business away from the private sector.

Municipalization and Related Activities in California

  • San Francisco city/county leaders commissioned a study in 1996 on the feasibility of condemning Pacific Gas and Electric's electric distribution system within the city/county and placing the system in use as a new municipal electric utility. The study showed a range ofpotential outcomes, depending on how much the city would have to pay for PG&E's assets. The most likely outcome was that the purchase would not allow a significant reduction in rates. Further review is under way.
  • The city of Anaheim requires telecommunications firms wanting to lay new cable not only to apply for permits and to pay permit fees, but to lay fiber optic lines for the city. The city, which owns and operates its own internal telephone system, is also constructing its own digital telecommunications system, designed to compete against or to lease capacity to private telephone companies.
  • A May 7, 1995 Los Angeles Times article described Anaheim's plan to "reap up to $10 million a year... by leasing" capacity on its own lines.

  • In Los Angeles, the city's Department of Water and Power (DWP) is evaluating the possibility of becoming a full service telecommunications provider, and competing with private telecommunications businesses providing service throughout its territory.
  • In November 1996, Los Angeles voters approved a charter amendment that will allow DWP to engage in virtually any business activity, including telecommunications or energy provision inside or outside its boundaries. The department is running an advertising campaign in preparation for 1998, when it will be able to compete for private utilities' electric customers. The department is seeking a private-sector partner to help it sell power to outside customers. The utility also has signed an agreement with Revelation Corporation, a network affiliated with churches, to provide power to individuals across the country who are members of the network.

    The city also has requested proposals from companies interested in partnering with the city to build a new fiber optic telecommunications network for the city's use as a service provider.

  • Modesto Irrigation District is partnering with Destec Power Services to move power across Pacific Gas and Electric's transmission lines and to compete for retail customers, with plans to grow its customer base and revenues by 5 percent per year (see highlighted discussion above).
  • Rock Creek Water District is seeking special legislation to give the district the same authority as an irrigation district so it could enter the power business.
  • Woodbridge Irrigation District is considering entering the power business at the urging of the city of Lodi, which wants to partner with the district.
  • In the city of Lathrop, owners of an industrial park are seeking approval to form an irrigation district for the purpose of providing power. The city decided not to hold a special election to form a municipal utility but may reconsider in the near future.
  • The city of Palm Springs' proposal to intercept electricity customers of Southern California Edison by metering each residence and business was rejected by the Federal Energy Regulatory Commission. Now the city is establishing a "virtual utility" to purchase power and move it across Edison's lines to compete with Edison (see highlighted discussion above).
  • Calaveras County placed a measure before voters last November on whether to condemn Pacific Gas and Electric facilities in that area and form a municipal utility. Voters rejected the proposal by 70 percent.
  • The city of Milpitas examined becoming a full service telecommunications provider to compete with private telecommunications firms. Their study concluded that the venture likely would not be very profitable.
  • In 1992, rather than condemn the distribution system of Southern California Gas Company, the city of Vernon created its own municipal gas department (which it said would build a parallel distribution system) and applied to the Public Utilities Commission for a traditional wholesale rate for itself, in order to serve only a few of the city's larger industrial businesses. The commission ruled that Vernon would be eligible for a traditional wholesale rate (which excludes distribution level costs) when it was capable of serving all the customers in the city. Until then, Vernon would only be entitled to an "interim wholesale" rate which was revenue neutral to SoCal Gas (and included the distribution level costs). The California Supreme Court refused Vernon's request to review the commission's ruling.
  • Contra Costa County, the city of West Sacramento, and South San Joaquin Irrigation District are each undertaking "energy options studies" to analyze possible municipalization and related activities.
  • The city of Burbank has installed a fiber optic network and has sold service to several companies. In December, a private telecommunications company requested a permit for a facility to serve a large customer and, to get approval, had to agree not to serve any other customer with that facility.
  • Glendale staff is preparing a report on potential installation of a city-owned fiber optic network.
  • The San Jose City Council instructed staff to pursue all avenues and options to become a telecommunications provider. A consultant has been hired to produce a plan within one year.
  • Walnut Creek officials studied the idea of providing telecommunications service and decided not to attempt it at this time, although the city is asking telecommunications companies to install more fiber than they need, so the city can make use of the excess capacity.
  • The city of San Diego commissioned a study on city provision of telecommunications service and decided not to engage in the business. The city has also issued a request for proposals on forming a "buyers' consortium" for telecommunications services.
The San Jose City Council instructed staff to pursue all avenues and options to become a telecommunications provider.

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