An Editorial Response:
Some critics wants PMAs out of the electric business. But that could leave market power to a few, large monopolies.
Department of Energy Secretary Federico Peña observed in an address at the recent annual meeting of the Edison Electric Institute: "The [electric utility] industry is incredibly diverse, with investor-owned utilities, municipalities, cooperatives, the federal power system, independent power producers, marketers and others. And the challenge we face today is to respect those complexities - not to underestimate them."
Richard Munson should have heeded this advice in writing his piece on "Public Power in a Competitive Marketplace," (PUBLIC UTILITIES FORTNIGHTLY, July 1, p. 24). Unfortunately, rather than respecting these complexities, as counseled by Secretary Peña, Mr. Munson has ignored them.
The logical starting point for any examination of public power in a competitive market should be a careful definition of the term. A careful discussion of the specific characteristics of the diverse entities often lumped under this definition should follow. Instead, Mr. Munson's polemic against "public power" is based on a gross misunderstanding and many mis-statements about what public power is and what role it has played and will continue to play in a competitive market.
Getting it Right
Rep. Ralph Hall (D-Texas), ranking member of the House Energy and Power Subcommittee, clearly understands the importance of getting the definitions right. In his opening statement at the subcommittee's July 9 hearing on public power, the Tennessee Valley Authority and the Pacific Northwest, he had this to say:
I think it would be helpful to quickly outline what public power is and what it is not. Basically, public power is the electric utilities that are owned and operated by the "public." There are over 2,000, and they are not for profit. Their owners may be counties, public utility districts, and an occasional state, but in a great majority they are owned by individual local communities. These are public institutions, and they are managed by public servants, located throughout the country. Their salaries are not dependent on how much energy they sell, or how big they can grow their utility. Their loyalty is to their customer-owners and to providing their community with not only electricity, but a fruitful economy and quality infrastructure. ... In addition to public power companies, there are also the federal power marketing administrations (PMAs) and the Tennessee Valley Authority. These, however, should not be confused with public power. While many public power systems purchase power from the PMAs and many public power systems distribute TVA power, they are distinctly different because of the reasons outlined above. Finally rural electric cooperatives or co-ops are not true 'public power.' Instead, they are 'private' cooperative organizations. At the same time, coops and municipal public power share the same interest and not for profit status. I encourage my colleagues to keep these distinctions in mind as we consider ways to restructure the electric utility industry. (Author's emphasis)
Public power as correctly defined by Rep. Hall has had an outstanding record in promoting competition from the first days of the industry. It was public power in the Otter Tail case that brought antitrust considerations into the electric utility regulatory framework. It was public power that convinced Congress to amend the Atomic Energy Act to require antitrust review by the Nuclear Regulatory Commission in permitting and licensing nuclear power plants. Transmission-access conditions resulting from this review made limited but important inroads in breaking down the IOU monopoly in transmission. It was public power that pushed for decades to obtain meaningful transmission-access authority for FERC.
The private power companies, fearful of competition, fought these and other pro-competition initiatives for decades. Today, these private companies are the most resistant to change and competition. These private companies continue, for example, to extract monopoly rents for transmission service. A recent survey by R.W. Beck for the American Public Power Association found transmission rates filed under the new Order No. 888 tariffs are on average 70 percent to 80 percent higher than rates IOUs charged for the same service under tariffs previously approved by FERC as "just and reasonable."
Today, a few IOUs have embraced competition. Most, however, are resistant. One thing most IOUs agree on is their continued opposition to public power, rural electric cooperatives, TVA and the federal power marketing administrations. But they have been railing against these entities for decades, generally with the help of purchased consultants and independent institutes that, for a price, agree to carry their water.
Haranguing Public Power
Much of Mr. Munson's piece is simply a tirade against the PMAs and TVA, institutions that have no presence in the Northeast or Midwest. He indicts all the entities that fall within his definition of public power. He does this implicitly by his imprecision of the use of "public power" and explicitly through challenges to the legitimacy of municipal utilities and rural electric cooperatives in a competitive market.
Congress will, of course, have to come to grips with TVA and the federal power program as it wrestles with industry restructuring legislation. But Congress would be wise to follow the advice of
Secretary Peña to respect the complexities of the industry, not underestimate them. Preserving industry diversity, including public power, co-ops and federal agencies, is important. Such diversity is an inexpensive insurance policy against the consolidation of power in the hands of a few, large, unregulated monopolies.
Public power has an outstanding record in curbing the abuses of market power by IOUs. But it appears that putting in place a structure to ensure that market power issues are properly addressed is not, in Mr. Munson's view, a necessary condition to developing a market where sustained competition will flourish. He simply wants the PMAs to "get out of the [electric] business and let the free enterprise system work."
Free enterprise is not about limiting markets to a few oligopolists and allowing them allegedly to compete for a limited number of hydropower sites on national waterways. It is about freedom to enter and exit markets; equal access to physical and financial capital; and the absence of monopoly power. These conditions produce low costs, efficient prices, incentives to innovate and reliable service for all consumers.
As Rep. Ed Markey (D-Mass.) observed at the July 9 hearing, if the efforts to restructure the electric industry produce results like those in the telecommunications industry - specifically the potential merger of AT&T and SBC Communications - then we might as well abandon the effort right now.
When conditions to support sustained competition are not present - especially for an essential service such as electricity - public enterprises are legitimate vehicles of public policy to help produce the results of competitive markets. The heart of Mr. Munson's protests do not involve subsidies or other cost advantages, real or alleged. He is challenging the very right of public enterprises to exist.
Mr. Munson does spend a considerable amount of time on "subsidies." As with public power he would do well to provide a solid definition of what a subsidy is. If a government sells a good or service to its citizens at a price sufficient to recover all of its costs, then it is not a subsidy. If the government could obtain a higher price from its citizens, but chooses not to, it has foregone a profit. This is the issue that is the core of the debate over PMA rates. Should the federal government seek to maximize its return on infrastructure investments? Or should it try to ensure the benefits are distributed to the public without the extraction of a profit at any level of the process? This is a legitimate policy question that is obscured not enlightened by pejorative references to subsidies.
Changing the Story
In contrast to the extensive discussion of subsidies to PMAs and TVA, Mr. Munson dismisses the monumental subsidies provided to the private power companies, relegating them to the "minutia" of the tax code. Twenty years ago, as the director of the Environmental Action Foundation, Mr. Munson wrote an article for The Progressive in which he extolled the benefits of public power and rural co-ops, noting that they "do more for their customers and charge less."
In that article, published in May 1977, he demonstrated considerable expertise in the minutia of the IOU tax subsidies. Specifically, he stated: "It is the private utilities which benefit most from the nation's tax laws. Congress passed legislation in 1969 allowing IOUs to charge their customers for Federal income taxes which will never be paid because of tax loopholes. Thus, in 1975, the nation's 150 largest investor-owned utilities charged their customers for $1.5 billion in taxes which were never delivered to the U.S. Treasury."
The only thing that has changed over the past two decades is the magnitude of the accumulated federal subsidies. When Mr. Munson's article was published in 1977, the IOUs had accrued more than $8 billion in net deferred income taxes. By 1994, this figure had grown sevenfold, to more than $57 billion. Without this and other subsidies, the rates of the private power companies in 1994, on average, would have risen 5 percent.
In a surprising twist for an article looking at a deregulated, market-driven electric industry, Mr. Munson finds time to complain about public power's exemption from meaningful state economic regulation. In a deregulated competitive marketplace environment, one wonders what sort of "economic jurisdiction" would be "meaningful."
Mr. Munson may be concerned for the consumers served by public power and rural cooperative systems in states like California and Pennsylvania, where customer choice applies only to the IOUs. The public power and co-ops may opt out if they choose. Speaking only for public power, the legislatures in those states apparently appreciate the value of local control, one fundamental precept of public power. As Mr. Munson observed in his article in the Progressive, such local control is important because it is "responsive to local communities rather than to absentee corporate interests."
Mr. Munson doesn't need to worry about public power's customers. In California, the Sacramento Municipal Utility District is beating the private power company schedule for the start of customer choice by six months. In other parts of the country, some public power systems are moving forward to provide customer choice in the absence of a state mandate. As a practical matter, no public power system could survive by denying its own customers a choice of suppliers when competing utilities are offering it.
As to public power's lobbying for exemptions from federal transmission-access legislation, Mr. Munson appears terribly confused. This provision of law was enacted primarily to address anti-competitive practices of the private utilities in denying transmission access. Public power did not argue, however, for an exemption from FERC jurisdiction when Congress was considering the Energy Policy Act in 1992 and none was provided. Every public power system with transmission is subject to a FERC order under that law.
True, public power systems are not automatically covered under the provisions of FERC Order No. 888. But bear in mind that Order No. 888 is premised on a FERC finding that the IOUs had provided transmission access on unduly discriminatory terms and conditions. This finding supported the generic approach to opening their transmission facilities. In any event, several public power systems with transmission have filed tariffs with FERC or belong to regional transmission groups that have filed. In addition, if a public power system seeks to take advantage of tariffs filed under that order, it must provide reciprocity. Mr. Munson is just simply wrong in asserting that reciprocity is not required.
Some Suggestions
If Mr. Munson and the Northeast-Midwest Institute are truly interested in taking steps to move from a regulated monopoly to a competitive electric marketplace, there are policies they might pursue that will remove impediments to competition and provide benefits to consumers. For example:
• Advocate repeal of restrictive federal and state laws and other policies that make it unduly difficult for municipalities to take over provision of electric service for their citizens;
• Challenge securitization proposals to finance retail stranded costs that will burden customers for decades to come;
• Oppose the secret rate deals that private utilities strike with industrial customers to the disadvantage of residential and commercial customers and to the detriment of an open and competitive marketplace;
• Challenge the excessive transmission charges now imposed by many private power companies who are still able to exercise market power by their control of these essential facilities;
• Challenge attempts by private companies to shift the costs of expensive power generation facilities onto utility transmission plants and rates; and
• Oppose efforts of private utilities to use their large financial resources to frustrate attempts by cities and towns to provide their own electric service.
Mr. Munson's leaps of logic and misinformed attacks on public power strive to deflect the real issues involved in the debate over the future structure of the electric utility industry. Recognizing the diverse composition of the industry is important. This diversity will benefit consumers and help achieve and sustain effective competition. Keeping in mind that the goal of restructuring is to provide the benefits of competition to all consumers is equally important. Public power is an important, potent and pro-consumer factor in this effort. t
Alan Richardson is executive director of the American Public Power Association. He joined APPA in 1977 and has been a spokesperson for public power at meetings and events throughout the country. In addition, he has testified before congressional committees and regulatory agencies and has published many articles on developments in the electric utility industry.
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