[BETA] Fortnightly

The 129 federally owned plants that make up the five PMAs generate about 6 percent of the electricity sold in the United States.1 By law, the PMAs sell wholesale power at cost to legally stipulated "preference customers" (em i.e., municipal utilities and rural electric cooperatives. The investor-owned utilities (IOUs), which sell most of the power generated in the United States, do not receive this preferential price.

Preferential access to cheap federal power lies at the heart of the PMA debate. IOUs service roughly 75 percent of power consumers. The current pricing scheme forces these consumers to subsidize (em directly or indirectly (em the 25 percent of consumers served by the PMAs at below-market rates. The PMAs have something of a noble history in electrifying the United States, but "rural" is no longer synonymous with "poor." You'd be hard pressed to find poor farmers in "rural" Hilton Head and Vail. And as far as the subsidies to Las Vegas are concerned:

"[When you] stroll leisurely down the gaily lit Strip, remember that you're about to lose twice. Once at the slots, and the second time when you realize that it's your electricity that's lighting up the night."2

Concern over government involvement in a commercial activity also fuels the debate. As wholesale and retail wheeling become more widespread and their benefits to consumers more apparent, government's continuing involvement could prove highly disruptive. In the competitive environment of the future, prices will respond to market forces, not cost-based regulation. The PMAs, like speedbumps, will only slow the transition.

In addition, the PMAs threaten the future competitiveness of the energy industry because they are both unfair and inefficient:

s IOUs lack access to power generated at PMA facilities

s Municipals and co-ops have no incentive to purchase power generated outside the PMA region, since the economies generated by wheeling are rarely

a match for the guarantee of at-cost purchase.

The most efficient system for energy consumers will leave all producers free to sell to any buyer, and all buyers free to purchase from any seller. The PMAs preclude the existence of such a market.

Out of Their Depth

Opponents of privatization offer a number of defenses, none of which hold water.

Argument #1: PMAs are not subsidized. Wrong. The PMAs are demonstrably subsidized in several ways, all of which tilt the playing field to favor municipal utilities and rural co-ops:

(a) Favorable rates to preferred parties. PMAs charge municipal utilities and

co-ops an average price of 2.5 cents per kilowatt-hour (¢/Kwh). The 1992 average price of electricity for non-PMA wholesale transactions was 4.5¢/Kwh, which means the PMAs sell power to their preferred customers at just a little over half its market value. According to the Congressional Budget Office (CBO), marketing this power to the highest bidder would add an additional $1 billion per year to the Treasury. This figure provides an approximate and conservative measure of the rate subsidy provided to the PMAs by taxpayers and non-PMA ratepayers.

(b) Low-rate loans with flexible terms. PMAs as a group owe the federal government more than $10 billion