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 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, with the right to transfer ownership through privatization.
Argument #4: Selling the PMAs will cause environmental degradation. Wrong. The PMAs themselves are open to the charge of damaging the environment. Selling electric power at below-market rates (em since it increases demand and leads to overconsumption (em is inconsistent with the government's energy conservation objectives, as noted by the Congressional Budget Office in its report, Reducing the Deficit. Consider also the deadweight losses generated by energy subsidies, which may involve environmental resources.
Comprehensive privatization proposals raise issues that concern impact on irrigation systems, wetlands, flood control, wildlife preservation, or recreation. These issues can be addressed through reasonable conditional sales that reinforce environmental goals. Some privatization proposals, such as President Clinton's, seek to minimize environmental impacts by selling only transmission facilities.
Argument #5: Privatization proceeds cannot legally be applied to deficit reduction. Wrong. If Congress chooses, it can alter budget-process law so that proceeds from PMA sales reduce the deficit. The President's FY 1996 budget indicates that he will request a legislative fix so that sale proceeds would apply toward deficit reduction. Congressman Foley addresses this objective by crediting sales proceeds to "miscellaneous receipts" in the budget.
Ironically, at the same time our executive branch is prohibited by law from studying the impact of a switch from market- to cost-based pricing of hydroelectric power,3 last year's foreign operations appropriations bill provided several hundred million dollars in funding for Russia and the other former Soviet Republics to ease their transition to a market economy, a transition that includes at least partial privatization of the energy sector. Similarly, the Mexico aid package carries the condition that Mexico vigorously pursue privatization of its governmental programs, including the energy sector.
We should do at home as we ask others to do.
Privatization of the PMAs is long overdue. The core issues in this debate are the unfairness of requiring one class of Americans to subsidize the power needs of another, and the impropriety of government-run commercial enterprises competing against and even excluding large chunks of the private sector from access to their output.
The notion that some buyers of electricity may be prohibited by law from bidding (em without subsidies (em on the output of a large part of our nation's electricity generating capacity is alien to American business practices, and to future low rates. The potential participation of all of America's generating and transmission capacity is essential if we are to supply the electricity needs of Americans most efficiently and at the least cost.
If PMAs do disrupt the otherwise inevitable coming of retail wheeling and consumer choice, their annual costs to society will be far greater than their annual appropriation, the below-market rates, and the tax advantages municipal utilities and rural co-ops now enjoy. Of course, the public won't be able to directly perceive those costs. These are the pernicious "hidden costs" of economic regulation that are difficult to tabulate but that nonetheless conspire to debilitate our nation's economic health. t
Clyde Wayne Crews, Jr. is the Fellow in Regulatory Studies at the Competitive Enterprise Institute in Washington, DC. Crews previously served as a legislative aide in the U.S. Senate, and worked as an economist at the Food and Drug Administration and at the Citizens for a Sound Economy Foundation. Mr. Crews is currently pursuing a PhD in economics at George Mason University. He holds an MBA from William and Mary and a BS from Lander College in Greenwood, SC.
A Heritage Foundation Proposal
A Certain percentage of the stock of the newly privatized PMA could be sold at higher post-initial-offering rates, effecting greater deficit reduction.
Create a privatization package that benefits all parties compared to the status quo. For example, for each PMA:
. Offer a 51-percent controlling interest to the public at the initial valuation.
. Give current customers the option to purchase stock in proportion to their use of power (perhaps paid for in installments on future electric bills)
. Reserve at least 10 percent of this 51-percent block for residential or small business customers
. Give small buyers an option to buy future additional shares at the original price if they hold their shares for a prescribed minimal length of time (This allows small investors or former customers to benefit from any increase in value that privatization brings, thereby increasing the likelihood that they go along with a sale.)
. Give the remaining 49 percent of the stock to the government to sell at the most attractive price. (The taxpayer will gain from any increase in stock value after privatization, because all the additional funds could be earmarked for deficit reduction.)
Proposed by the Heritage Foundation in 1986, based on the British experiences with Britoil and British Telecom.
Getting Our Feet Wet
Congress might consider initially dealing with the problem by establishing a commission similar to the Military Base Closure Commission. The commission would assemble a package of facilities to privatize, perhaps across PMA regional lines; submit the package to the President for revision; and then hold an up-or-down vote.
Alternatively, Congress could attempt to privatize the five PMAs individually, working from the easiest case to the hardest. Knowledge gained from each sale would be applied to the greater difficulties at the next level. (The Senate bill to privatize the Alaska PMA may mark the first step on this simplest case (em a matter of only two power plants.)
1 See, Reducing the Deficit: Spending and Revenue Options, Congressional Budget Office, February 1995.
2 See, Martin Gross, The Government Racket: Washington Waste from A to Z.
3 An amendment to the Continuing Appropriations Resolution for FY 1983, renewed in subsequent law, prohibits the government from conducting "any studies relating to or leading to the possibility of changing from the currently required 'at cost' to a 'market rate' method for the pricing of hydroelectric power.
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