Subsidies? Maybe. But how about reciprocity? Should Congress let PMAs, munis and co-ops decline open access?

Until recently, most congressional debate on utility deregulation has focused on the future of investor-owned utilities and independent power producers and marketers. Lobbyists for government-owned or cooperative-owned power companies have tried to downplay their clients or to seek exemptions. Yet as the electricity industry is opened to competition, lawmakers cannot ignore public- or government-owned power companies, which supply 25 percent of the nation's electric consumers. They should not exempt some of this nation's largest utilities from competition. Most important, they should not prohibit public power's consumers from enjoying the benefits of competition.

Restructuring legislation must address public power, if for no other reason than that it represents a significant segment of the electricity industry. In this era when lawmakers want both to advance competition and to cut the deficit, the federal government's own power entities, Bonneville Power Administration and the Tennessee Valley Authority are particularly vulnerable to reform.

The electricity market has changed substantially in the last 70 years. It will change even more in the next few years. TVA and the power marketing agencies, just like the rest of the electricity industry, must change as well. The status quo is simply too expensive for both taxpayers and ratepayers.

It's the Ratepayer's Loss

Independent auditors are only beginning to examine taxpayer subsidies provided to public power. PMA backers for many years used their political clout to insert language in appropriation bills that forbade the use of government funds even to study such federal power subsidies. Recent analyses, however, suggest substantial taxpayer benefits are provided to a few preferred customers.

Perhaps the most extensive audit to date was done in September 1996 by the U.S. General Accounting Office. The office found three PMAs (em Western, Southeastern, and Southwestern (em fail each year to recover some $300 million in costs. The burden is left to taxpayers across the country. PMA beneficiaries issued a lengthy critique with complex and convoluted denials of any ratepayer benefit. GAO subsequently rebutted each of those claims, again showing how U.S. taxpayers are picking up the slack.

The subsidy to government-owned utilities can be defined in several ways. The GAO report examines PMA costs that electricity charges do not cover. The Congressional Budget Office, in its 1996 annual review of how to reduce the federal deficit, says that the Treasury loses approximately $350 million per year because PMAs sell power at below-market rates.

The U.S. Energy Information Administration claims the federal government provides an interest rate subsidy to PMAs of approximately $1.2 billion each year. Another $2 billion subsidizes below-market sales by PMAs. The Grace Commission calculated the market value of PMA facilities, or what the federal government would get in an open sale, at $75 billion. Although economists may differ in their approaches, the point is that even in Washington, such subsidies are far more than pocket change.

The American Public Power Association and the National Rural Electric Cooperative Association continue to deny the existence of taxpayer benefits. One APPA executive, despite the array of contrary evidence, said: "The federal power program pays for all the investment, with interest, and covers O&M renewals and replacements plus supporting agriculture. The program is not subsidized. It is a self-supporting capital budget item."

NRECA declares: "The PMAs operate as a self-sustaining, no-cost program that actually will return billions of dollars in revenue to the U.S. Treasury each year. The cost of the federal power facilities are being repaid in full and with interest by customers of the PMAs."

Lawmakers must ask whom to believe: Is it the self-interested recipients of PMA power or this nation's top, independent auditors? PMA beneficiaries, in fact, make contradictory statements about their subsidies. On the one hand, PMA beneficiaries deny the existence of any taxpayer benefit. On the other, to argue against privatization, they plead that the price of power without PMA benefits will go through the roof.

PMAs often complain that investor-owned utilities are the ones with all the breaks. Private and public utility lobbyists long have brought out their accountants and economists to argue the minutia of tax-exempt financing and deferred taxes. This finger pointing is particularly dangerous for managers of government-owned power companies. TVA's chair tried this approach in March 1997 before the House Appropriations Committee: "If there are any advantages at all, they go to the private power companies and not to us."

Rep. Mike Parker (R-Miss.) noted the inconsistency of this statement and argued for privatization: "If private power companies have it so good, then TVA should become one. If they've got it so good, I want you to be in that system."

Expected soon are more GAO and CBO studies on federal power subsidies, including those provided to TVA, Bonneville and the Rural Utilities Service (the REA's new name). The existence of taxpayer subsidies to a select group of electricity consumers can no longer be hidden or denied. The question for policymakers is whether those subsidies are appropriate in this era of deficit reduction and electricity competition.

A principle of any deregulation bill will be to ensure that the generation market is as competitive as possible. The current array of subsidies, therefore, are problematic not just because they waste taxpayer dollars, but because they distort a competitive market.

Lost Revenue, Oversight

The prospect of retail competition highlights several inequities in the current role of federal electricity vendors. Bonneville, for instance, already sells billions of dollars of "excess" federal power to wholesale customers in California. TVA is trying to market electricity outside its "fence." Should American taxpayers be helping these select utilities participate in a competitive electricity market?

Also troubling is the fact that Bonneville's current marketing of taxpayer-subsidized electricity outside the Northwest is done without any oversight. It is sold without any of the safeguards and procedures associated with federal sales of coal, oil or natural gas. The Mineral Leasing Act of 1920 sets up elaborate procedures to ensure that taxpayers receive "fair market value" for the sale of the federal government's massive reserves of coal, oil and natural gas. The act ensures full disclosure, minimum bid procedures, appeals, audits and judicial reviews. No such procedures affect the sale of federal electricity.

When Bonneville recently sold 200 megawatts of power to a Southern California marketer, it did not organize an open bidding process. It did not determine a fair market value. It did not reveal the final selling price. One wag noted, "Billions of dollars worth of power produced at taxpayer expense were sold with less care than would accompany the sale of surplus federal property like used typewriters or fill dirt." If lawmakers are to advance retail competition, they obviously also must establish a system to ensure that federal taxpayers get fair market value for the sale of their electricity.

A program to sell electricity produced at federal facilities could be modeled on the Mineral Leasing Act of 1920, ensuring an open and fair system. Sales to the highest bidder would return to American taxpayers the billions of dollars they have invested in dams and generating facilities. It would provide a good source of funding for maintenance and upgrades at these facilities. With audits, appeals and judicial reviews, a new system also would curtail today's backroom deals and block potential corruption.

The Debate's Other Side

A key issue in the deregulation debate is whether federally owned power companies are still relevant. No doubt, the TVA, PMAs and the Rural Electrification Administration were needed (em once. For example, as recently as 1935, only 15 percent of rural Americans enjoyed electricity. Now, 99.9 percent of America is wired. TVA, PMAs and REA achieved enormous accomplishments.

Yet Sen. Frank Murkowski (R-Alaska), chair of the Senate Energy and Natural Resources Committee, has succinctly noted, "Once upon a time it was good public policy to bring power to regions of the country that did not have it, but that need has long since ended."

Rural America. Public power advocates argue that reforming government-owned electricity companies will hurt rural consumers. Yet it's investor-owned utilities that provide a full 60 percent of power to rural Americans, not public power organizations. IOUs serve 79 percent of small-town consumers. What is also surprising is that private power companies offer lower electricity prices to rural consumers than do 70 percent of their neighboring rural electric cooperatives. Based on these statistics, lawmakers need to resist equating the welfare of rural consumers with the interests of rural public power managers.

Public power advocates also claim that competition will leave certain rural customers behind. A similar argument was used against airline deregulation, but the situation with electricity competition is much different. Electric poles and wires in rural areas, whether public or private, are already in place. These distribution lines will not be torn down. Unlike airline routes, the electricity distribution infrastructure is a fixed, immovable asset. Once rural customers are hooked up, they can access electricity over this fixed infrastructure. The issue is not whether public power customers will have power, but whether they can join other Americans in obtaining competitively generated electricity.

Public power advocates say that deregulation will send the price of electricity to rural consumers through the roof. Nonsense, say independent power marketers who are so confident of increased efficiencies that they predict lowering electricity bills for urban and rural consumers.

The environment. In another scare tactic, PMA managers and their beneficiaries suggest that reform means abandoning public dams, navigation, irrigation, salmon and wildlife habitats and recreational areas.

The head of the BPA recently said, "The region has rallied behind us despite our problems. I mean, you do not want to be the Northwest politician that gets blamed for losing the Columbia River system and losing Bonneville."

Privatization, of course, would get the federal government out of the electricity business, but it would not abandon the Columbia River system. Even the most ardent of privatization advocates talk about selling only the hydroelectric assets of PMAs and TVA. Their plans would have the federal government still control the dams and the water flows and still provide navigation, irrigation, fishing, habitat protection and restoration and other recreational benefits.

Reform, in fact, offers the opportunity for substantial environmental improvements. One reason is that market discipline would curtail wasteful energy consumption, the construction of unnecessary power plants and the generation of inordinate pollution caused by subsidized rates at TVA and the PMAs. Second, privatization offers the chance to renegotiate the terms for operating hydropower facilities, setting future dam use priorities and improving the dismal record by federal agencies on protecting endangered species and habitats.

Exemptions from Regulation

Public power advocates argue that they should be exempt from state and federal regulation. Such exemptions, however, will be blatantly unfair in a competitive environment.

Only 41 states have meaningful economic jurisdiction over municipal utilities, and only 31 states have meaningful economic

jurisdiction over rural electric cooperatives. In California and Pennsylvania, lobbyists for municipal utilities and electric cooperatives won exemptions from state retail restructuring programs. When Congress approved the Federal Power Act in 1992, lobbyists for PMAs, municipal utilities and most cooperatives also won exemptions from meaningful regulation. Importantly, these entities are not subject to FERC Order No. 888, and, therefore, can deny open-access transmission.

A municipal utility having a transmission system (em that either doesn't own power generators or doesn't want to sell power at wholesale (em need not open its network to other power companies. That municipality, however, can obtain wholesale power from others and require surrounding utilities to provide open access. Public power entities, therefore, get the full benefits of open access to private utility systems but do not have to reciprocate.

Similar inconsistencies affect retail sales. California's recent restructuring bill, for instance, requires municipal utilities to put their transmission systems under the control of an independent system operator. However, municipal utilities are not required to give their customers retail access to competitors until two years after private utilities have done so.

The Tennessee Valley Authority also is exempt from open-access requirements. A "fence" created by the TVA Self-Financing Act of 1959 protects it from competitors. TVA officials have tried aggressively to sell their power outside the fence (a federal court recently blocked those attempts). But they don't want other power providers competing in TVA's monopolistic service territory. In creating an open electricity market, therefore, lawmakers must give special attention to TVA's control of key transmission lines in the Southeast (and Bonneville's control of key transmission lines in the Northwest).

Realizing Reform

PMA beneficiaries have successfully beat back reform proposals for many years. Some lawmakers on Capitol Hill fear the political clout and lobbying might of this special interest group. Public power's special-interest lobbyists are among the largest PAC contributors. Rural co-ops alone provided almost $1.5 million to favored candidates in 1996. But the politics of the PMA debate have changed dramatically in the past few years.

Public power is no longer a monolith. Like investor-owned utilities, public power advocates have diverse opinions that vary depending upon their suppliers and balance sheets. Several rural cooperatives and municipal utilities, for instance, receive no preference power from PMAs or TVA and, therefore, have more pressing concerns.

PMA reform has finally become a real possibility. Reform options, of course, vary substantially. The federal government, for instance, could maintain control of its hydroelectric assets and only sell the power to the highest bidder. If lawmakers have a particular allegiance to the preference clause, they could allow munis and co-ops the right of first refusal for that power at market rates. If lawmakers don't like selling federal assets, they could lease the

hydroelectric equipment to the highest bidder. Congress also could amend the Energy Policy Act to ensure that the federal government makes its own transmission lines available, without self-dealing, for open transmission of wholesale electricity. Another option is for Congress to end expensive subsidies and regulatory exemptions for public power.

Perhaps the most direct reform is privatization. In the last decade, at least 24 countries have launched electricity privatization programs. These reformers include highly developed countries such as Australia and Britain, and developing countries such as Argentina and Brazil. Even former communist countries such as Hungary and Poland have done so.

Sen. Murkowski, who knows first hand about the privatization of the Alaska Power Administration, stated the issue succinctly: "When the rest of the world is trying to get government out of business, so should we."

The privatization debate offers some fascinating rhetorical inconsistencies. Some conservative PMA beneficiaries argue vehemently that the government should get out of business and let the free-enterprise system work. Although they wouldn't fathom having the Air Force compete with United Air Lines, some maintain that Washington should continue to own and control some of the nation's largest electric utilities.

A long list of suitors (em power brokers, independent power producers, investor-owned utilities and investment bankers (em have expressed an interest in buying PMA or TVA assets.

Tucson Electric, an investor-owned utility, has offered $550 million for just the Arizona assets of the Western Area Power Administration. Otter Tail Power Company, another IOU, has submitted a separate offer to purchase other WAPA assets.

Selling TVA, assuming the deal fetches 1.5 times the agency's book value, would bring $10.5 billion to the Treasury. The sale would also generate a continual stream of revenue as the private corporation pays taxes year after year (em something TVA has not done.

Peter Lynch, the former analyst at Fidelity's Magellan Fund, noted, "There has never been a serious effort to privatize the TVA, but if there was I would be the first in line to get a copy of the prospectus."

William Malec, TVA's former chief financial officer, agrees that the time for privatization has arrived. He says TVA's power generating assets could fetch some $50 billion on the open market. "Selling off TVA is a natural next step," says Malec.

Richard Munson is executive director of the Northeast-Midwest Institute, a nonprofit policy center in Washington, D.C.

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