Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now


Fortnightly Magazine - May 1 1996

for the cost of constructing existing plants, which they are repaying at a subsidized rate of about 3.5 percent over flexible 45- or 50-year schedules. Since the government borrows money at about 8 percent, taxpayers eat the difference. The PMAs can also pay their debt off selectively, paying off higher-rate debt first while leaving lower rate debt on the books (em an option rarely available to private firms. PMAs do not depreciate their assets according to Generally Accepted Accounting Principles either; thus, they overstate revenue.

(c) Tax advantages. IOUs must pay taxes. Municipal utilities are exempt from federal and state taxes, and co-ops often are exempt. Municipal utilities also may issue tax exempt securities, while co-ops receive subsidized credit through the Rural Utility Service (formerly the Rural Electrification Administration).

(d) Annual federal appropriation. Over a billion

dollars still go to the PMAs every few years. For example, PMAs received an appropriation of $345.3 million in fiscal year 1994 and $272 million in fiscal year 1995. All these subsidies create deadweight losses by artificially lowering producer costs, making the PMAs willing to supply more at any given price. However, their real resource cost does not change, which means that power purchasers consume more resources than they actually pay for.

Argument #2: Electric rates will increase for PMA customers. Wrong. The problem of rate increases is overstated since PMAs are rarely the exclusive or dominant supplier of power. Privatization of the PMAs can be structured to produce minimal or negligible rate impacts (em perhaps even a net plus for PMA consumers. The bill proposed by Congressman Mark Foley (R-FL), for example, includes yearly rate caps to protect PMA customers.

Selling the PMAs will improve the efficiency of the industry so that all customers and future generations benefit. The economies to be gained from combining and integrating PMAs with existing infrastructure are critical to benefiting consumers overall. A market in which electricity is wheeled across state and regional lines, and consumers select vendors as they select phone companies, promises to keep everyone's rates low.

Argument #3: PMA consumers hold "equity ownership." Wrong. Ownership conveys the right to dispose and transfer property. PMA customers merely enjoy the right to the electricity that they have contracted for and consumed. The fact that PMA customers through their bills have partly paid to service the debt of the PMAs is not relevant: Every customer of every firm that has borrowed money in some sense helps cover that firm's financing costs, since all private firms must charge enough for their product to at least break even.

It is especially ironic for a user of a subsidized service or product to claim an ownership stake in the firm that produces it. Even though IOUs and their customers have been paying the market rate for electricity from nonutility generators, they do not claim that they own or have a right to halt the sale of such facilities. Since taxpayers have been paying full price for their own electricity while also subsidizing the PMAs, they are more justly the "owners" of the PMAs,