Paying for Power: Taxpayer-subsidized Electricity in Washington State

By ELAINE R. DAVIS  | 
POLICY BRIEF
|
Jan 1, 1997

Introduction

Washington State is unusual in the make up of its electric utility industry. In Washington government-owned utilities like the Bonneville Power Administration (BPA), cities, and public utility districts (PUDs), and rural cooperatives deliver 69 percent of the electric energy consumed by the state's residences and businesses. Investor-owned companies -- Puget Sound Energy (formerly Puget Sound Power and Light), Washington Water Power and Pacific Corp -- deliver the remaining 31 percent.

Findings

Electric utilities owned by governmental entities and cooperatives make up more than 69 percent of electric energy delivered to Washington customers. Nationally, these utilities account for only 24 percent of electric energy deliveries.

Government-and cooperatively-owned utilities and their customers are heavily subsidized in Washington.

If these utilities operated under the same financial conditions
as Washington's investor-owned utilities with respect to taxes, cost of capital and federal power pricing, government- and cooperatively-owned utilities would have had to charge 38 and 72 percent higher rates, respectively, in 1994.

On average, customers of government-owned utilities, like Seattle and Tacoma City Light and Snohomish PUD, would each have been required to pay an additional $748 in 1994.

Average customers of Washington's cooperatively-owned utilities would have paid an additional $1,078 in 1994, if they had to operate under the same financial conditions.

Tax exemptions and subsidies often mask operating inefficiencies and unnecessarily high costs. As the electric utility industry deregulates and becomes more competitive, these subsidies must be eliminated.

Nationally, the picture is reversed. Only 24 percent of the nation's power was delivered by government and cooperatives, with private companies furnishing 76 percent. The difference promises to result in some upside-down alliances over the next few years. In this second report on electric utility restructuring, we focus specifically on subsidies and other government-induced competitive advantages that are available to Washington's government- and cooperatively-owned utilities. It is a relatively thin slice of the current debate that has not received much attention outside of a small circle of utility experts, but it has startling and disturbing ramifications for our state.

In other areas of the country, like California and Massachusetts, where efforts to deregulate the electric industry are on a faster track, an issue has emerged that people are referring to as "municipalization." Its meaning reinforces the inelegance of the word. It refers to aggressive attempts by local governments to take over electric utility functions, territory, and, sometimes, equipment, which have typically been owned and operated by the private sector. Using special subsidies, regulation, and condemnation, these attempts are being paid for with tax dollars. Although Washington's public utilities have not yet made substantial efforts to compete outside their traditional boundaries, the list of attempts to "municipalize" electric utilities elsewhere across the country is long and getting longer. So, too, is the list of potential beneficiaries of the government subsidies. They include the various government-owned utilities, which view this new era of competition as a springboard to new revenue sources; large electricity users -- primarily large manufacturing businesses - as well as groups of smaller businesses that don't want to be left behind in the shuffle; and the major, new competitors in this changing industry -- the power marketers -- who buy cheap power wherever they can, transmit or "wheel" it across privately-owned transmission lines that are now open to anyone wanting to use them, and then sell it to utilities -- often public utilities -- with ready-made retail customer bases.

The losers in the near-term will be private, regulated utilities that must answer not only to their shareholders, but to state regulatory commissions that approve or deny much of how they do business, including how they set their rates. In Washington, the Utilities and Transportation Commission regulates electric rates charged by the private power companies. These businesses must steel themselves, not only for the new government regulations associated with a restructured, more competitive industry, but for a 38 percent rate disadvantage here in Washington, which is directly associated with subsidies enjoyed by municipal utilities and public utility districts -- their new competitors. For rural cooperatives the difference -- and the disadvantage to private firms -- is even greater.

As noted at the outset, Washington is unusual. These subsidies -- most of which are funded by federal tax dollars -- benefit many people in this state. But what was acceptable national policy during a regulated era does not work in a competitive environment. In a competitive environment, they provide a substantial advantage to the public utilities receiving them. The intent of Congress to encourage competition in the electric utility industry is being undermined by these subsidies whose original purpose can no longer be justified.

Nationally, these subsidies are paid for by about three-quarters of the nation's taxpayers. The remaining 24 percent that benefits is not only from hard-to-reach rural areas or low-income urban neighborhoods. It also includes such billing addresses as Hilton Head, South Carolina, and Aspen, Colorado. Closer to home, Broadmoor, Blue Ridge and Magnolia -- all upper-end Seattle neighborhoods served by Seattle City Light -- also enjoy these subsidies.

Congress is unlikely to leave them alone much longer. The price tag is too high and too difficult to justify. National studies estimate that more than $8.7 billion in federal, state and local revenues were used to subsidize public utilities nationally in 1992 alone. This $8.7 billion grew to $10.9 billion in 1995, according to a recent update.

A review of Washington's electric utilities indicates that approximately nine percent of these subsidies ends up here -- about $955 million in 1994. By comparison Washington uses only three percent of the nation's electricity (measured in kilowatt hour sales to ultimate customers). Most of us living in Washington have enjoyed the benefits of these subsidies at some point in time. And most of us will be hard-pressed to encourage our legislators and congressional representatives to vote to eliminate them. But, the rest of the nation is unlikely to be sympathetic, or willing much longer to help us pay for our electricity; nor, is the country well served by allowing public utilities to compete on the strength of unevenly applied government policies. To do so jeopardizes successful deregulation of the electric industry. The question is not whether these subsidies will or should be eliminated, but when, and whether we, in Washington, will have contributed to a workable solution that allows us a stable transition to a new set of rules.

Paying for Power describes the financial preferences received by Washington's government- and cooperatively-owned utilities and their customers in 1994. These tax exemptions, low cost financing programs, and preferences for low-price federal electric power subsidized the electricity rates of 69 percent of Washington's electricity consumers. This report quantifies the value of each of these programs in Washington. In doing so, it illustrates the extent to which these subsidies represent an unfair and disturbing disadvantage to our private, investor-owned utilities in the new era of competition.

Section I -- Background

The Energy Policy Act of 1992 and the regulations subsequently adopted by the Federal Energy Regulatory Commission (FERC) require that all utility providers restructure their operations to allow wholesale competition. Under the Act electrical transmission activities are being separated from generation and distribution, so that transmission lines can be open to use on an equal basis by all parties, including the transmission owner, wishing to sell wholesale electricity. These changes represent a major step forward for the electric utility industry. More than half the states are reviewing legislative proposals that lay the groundwork for retail competition. But numerous issues remain unresolved: Stranded costs -- capital investments made by utilities that would have been recovered over time under the old, rate-of-return system of rate regulation -- is one of these. It has received by far the most attention in the media, but it is not alone. Also unresolved are: determination of how high-cost customers will continue to be served at affordable prices; how markets will treat electricity in the face of the converging interests of competitive gas, cable television, and telecommunications to bundle services to similar customer bases; how best to initiate competition at the retail level; and how to handle financial preferences afforded by government to certain types of utilities. This paper addresses this last issue.

This paper looks specifically at electric utilities in Washington. It measures the values of exemptions, subsidies, and preferences available to municipally owned electric utilities, public utility districts (PUDs), and rural cooperative electric utilities located in this state.

A paper published earlier this year provided background on electric utility deregulation -- its history, the national events that led to the issues being wrestled with today by policy makers across the country, and the competitive advantages afforded by government and enjoyed by municipal utilities, PUDs and co-ops.

Citing national studies that calculated these advantages in 1992 to result in 16 or 17 percent lower electricity rates nationally, that paper concluded that, "At a minimum, jurisdictions that regulate particular activities should not also be allowed to compete in those activities. Ultimately, however, in order for real competition to succeed and for the cost-saving efficiencies in both electricity and telecommunications to be enjoyed by all consumers, we may need to question the continued wisdom of government-run utilities."

The report that follows describes more fully how electricity is provided in Washington and by whom. It presents calculations of the financial subsidies and exemptions received by Washington's government- and cooperatively-owned utilities and their customers in 1994 . In doing so, it forms the basis on which to understand more fully the negative effects of some long-accepted public programs. It concludes that these programs are distorting the competition for electric power and ultimately threatening the success of electricity deregulation. It calls for policymakers to question the justification and continued purpose of these programs in the competitive electric energy marketplace of the next century.

Section II -- Electric Utilities in Washington

Similar to the picture nationally, both private and public utilities in Washington State generate, transmit and distribute electricity to their respective customers. There are three private utilities that deliver electricity to customers in Washington:

Puget Sound Energy (formerly Puget Sound Power and Light Company); Washington Water Power; and Pacific Corp.

Washington's public utilities include:

  • 19 municipal utilities, like the cities of Seattle, Tacoma, Ellensburg, and Port Angeles
  • 24 public utility districts (PUDs), like Snohomish, Clark, and Chelan PUDs
  • 15 rural cooperatives, like Inland Power and Light Company, Benton Rural Electric Association, Okanogan County Electric Cooperative, and Ohop Mutual in Pierce County
  • and, The Bonneville Power Administration (BPA)

Maps, provided by BPA, show the location of these utilities throughout the state.

Unlike the nation as a whole, public utilities dominate Washington State's electric power industry. As Figure 1 shows, while private utilities delivered 76 percent of the nation's electricity in 1994, they only delivered 31 percent of Washington's electricity. Local government utilities -- cities and PUDs -- account for 48 percent of electricity sales in Washington compared with only 14 percent nationally. Federal utilities, like BPA, are much more prevalent in Washington --17 percent, compared with just two percent nationwide. Finally, rural co-ops, which represent eight percent of electricity sales nationally, account for only four percent of sales to ultimate customers in Washington.

Due to this region's water resources and their ability to produce relatively inexpensive hydropower, electricity rates in Washington are substantially lower than average rates nationally. As Figure 2 illustrates, investor-owned utilities nationally charged an average of 7.14 cents per kilowatt-hour (kWh) to ultimate customers in 1994, compared with 5.39 cents per kWh charged by investor-owned utilities in Washington. Thus, nationally rates are more than 32 percent higher than in Washington.

Similarly, local government-owned utilities nationally charged an average of 6.10 cents per kWh, compared with 3.65 cents per kWh for PUDs and city utilities in Washington. Federal utility rates averaged 2.76 cents per kWh, nationally, compared with 2.34 cents per kWh charged by BPA on average to its direct service industries, like Intalco and Alcoa aluminum companies. Finally, cooperatively-owned utilities charged 7.01 cents nationally, compared with 4.83 cents per kWh in Washington.

Figure 2 also illustrates the differences between private and government-owned utility average rates. Nationally, private utilities charged about 17 percent more per kWh than government-owned utilities in 1994. Specific analysis has not been conducted on the portion of this 1994 differential that is explained by special subsidies and exemptions. However, analysis of 1992 national data , suggests that much of this rate differential is explained by the preferential financial treatment received by government utilities from federal, state, and local government programs and policies. A study by Putnam, Hayes and Bartlett, Inc. (PHB), an international economics and management consulting firm, concluded using 1992 data that in the absence of the government-granted subsidies and artificial competitive advantages, government- and cooperative-owned utilities nationally would have had to charge rates that were 17 and 16 percent higher, respectively.

A recent update using 1995 data calculates these price increases to be 20 and 19 percent, respectively.

Figure 2 1994 Comparison of Average Rates (Cents per kWh)

In Washington State the total rate discrepancy between private and government-owned utilities is greater - nearly 48 percent in 1994. The analysis presented in Section III demonstrates that federal, state and local government policies favoring government- and cooperatively-owned utilities explain most -- about 79 percent -- of this difference in rates.

Section III -- Exemptions and Subsidies

Date Sources, Methods, and Technical Review

Data shown are for 1994 and are taken primarily from financial data prepared by individual utilities and submitted to the U.S. Department of Energy, Energy Information Administration. Detailed financial statistics do not readily allow separating the portions of firms doing business outside the state of Washington. For this reason the detailed calculations presented in this section include Washington Water Power, but do not include Pacific Corp. Although not precisely equal, the territory in Washington State served by Pacific Corp is significantly offset by the territory outside of Washington served by Washington Water Power. We, therefore, allow an overstatement in one to serve to offset the understatement in the other.

Data for cooperatively-owned utilities come from the U.S. Department of Agriculture, Rural Utilities Service.

The methods used to calculate the subsidies are also summarized. These methods were adapted from work at the national level by Putnam, Hayes &Bartlett, Inc. (PHB), an international economics and management consulting firm, for the Edison Electric Institute. This analysis has incorporated certain methodological refinements made by PHB in a recent update of financial conditions. As well, a draft of this work has been reviewed by PHB for its methodological consistency with these national studies. We want to take this opportunity to acknowledge PHB's important contribution to this work and to express our appreciation for their help. Any mistakes in computation, methodological application, or interpretation are the sole responsibility of the author.

Anyone wishing to review a more detailed description of the methods, assumptions, sources, and data used for each computation may request a copy of the Technical Appendix to this report by calling the Institute office at 1-888-WIF-9797.

The subsidies and financial advantages that are available to government-owned utilities (city electric utilities and PUDs) and cooperatively-owned utilities are presented in four categories. These are:

  • Federal income tax exemptions
  • Other federal, state and local tax exemptions
  • Subsidized financing programs, like low-interest rate loans and loan guarantees and tax-exempt financial securities
  • and Preferential access to low-price, federally-generated power

A description of each of these and their calculated value to publicly-owned utilities and their customers in Washington are presented below.

A. Federal Income Tax Exemptions

In 1994 Washington's investor-owned utilities incurred a liability of about $146 million in federal income taxes, net of adjustments for investment tax credits. This amount represented about 4.5 percent of their combined net assets. Government- and cooperatively-owned utilities do not pay income taxes. If they were similarly situated to investor-owned utilities (i.e., without their government-granted subsidies, exemptions etc.), they would pay federal income taxes generally in the same proportion to their net assets as their private counterparts. Government-owned utilities would have required additional revenues of $278.3 million in 1994 revenue to cover these taxes. As shown in Table 1, with actual 1994 operating revenue of about $2.3 billion, the $278.3 million in additional revenue represents nearly a 12 percent increase.

Table 1
Federal Income Tax Expenses
(1994 $ Millions)


Private Utilities City Utilities & PUDs Cooperatives
Federal Income Taxes
$146.210
$0
$0
Net Assets
$3,223.449
$6,136.399
166.777
Additional Revenue
Required to Equalize

$278.337
$7.565
Operating Revenue
$1,645.349
$2,349.713
$91.481
Percent of Operating
Revenue

    11.85%
8.27%

Similarly, cooperatively-owned utilities in Washington would have needed an additional $7.6 million in revenues in order to pay federal income taxes -- an eight percent increase in their 1994 operating revenue.

B. Other Tax Exemptions

Although requirements vary from jurisdiction to jurisdiction across the country, public utilities and cooperatives are often exempt from other federal, state, and local taxes. These include ad valorem taxes, gross revenue or gross receipts taxes, state unemployment insurance taxes, franchise taxes, federal excise taxes, the employer share of social security taxes, property taxes and all other taxes assessed by federal, state, county, municipal, or other local governmental authorities, except income taxes. Public utilities pay many of these taxes in Washington , but not in the same proportion as private utilities.

Table 2
Other Tax Expenses
(1994 $ Millions)


Private Utilities City Utilities & PUDs Cooperatives
Other Taxes
$143.841
$133.536
$5.585
Net Assets
$3,223.449
$6,136.399
$166.777
Additional Revenue
Required to Equalize

$140.291
$1.857
Operating Revenue
$1,645.349
$2,349.713
$91.481
Percent of Operating
Revenue

5.97.%
2.03%

As shown in Table 2, government-owned utilities paid about $133.5 million in other taxes in 1994. This amount includes an estimated $2.2 million for contributions and services, like street lighting and electric service to public buildings provided without charge. This represents about 2.2 percent of their net assets. Private utilities' other tax obligations amounted to about 4.5 percent of their net assets.

If government-owned utilities paid other taxes in the same proportion to their net assets, therefore, they would require an additional $140.3 million in 1994 revenue. This represents a six percent revenue increase. Cooperatively-owned utilities would have needed to increase revenues by about $1.9 million in 1994 -- a two percent increase in their operating revenue.

C. Cost-of-Capital Subsidies

Investor-owned utilities, for the most part, must pay market interest rates on their capital borrowing. In contrast, government- and cooperatively-owned utilities have access to numerous programs that allow them to finance their capital projects with below-market borrowing rates. These include:

  • Tax-exempt bonds purchased by investors who, because they are able to avoid federal income taxes on their earnings, are willing to accept lower earnings on the money they provide;
  • Low-interest loan programs available most often from the federal government; and
  • Federal loan guarantee programs, which prompt banks to reduce the interest they would otherwise charge, because the loan is being secured by the federal government.
  • Additionally, without the special preferences, exemptions and other support that they receive from government, government- and cooperatively-owned utilities would have to reconfigure their capital structure and offer the same returns to investors in their securities as do the investor-owned utilities. Accordingly, if government-owned utilities in Washington faced the same cost-of-capital requirements as investor-owned utilities, they would have needed $84.2 million more revenue in 1994. As shown in Table 3, this represents about a four percent revenue increase.

Similarly, Washington co-ops would have required a $5.0 million increase in 1994 revenue in order to equalize capital borrowing costs -- a five percent increase.

Table 3
Cost of Capital Expenses
(1994 $ Millions)


Private Utilities City Utilities & PUDs Cooperatives
Return on Capital
$286.416
$440.756
$9.917
Net Assets in Service
$3,243.690
$5,944.653
$168.798
Additional Revenue
Required to Equalize

$84.153
$4.988
Operating Revenue
$1,645.349
$2,349.714
$91.481
Percent of Operating
Revenue

3.58%
5.45%

Technical Note #1 on Cost of Capital

Over time private utilities have benefited from certain tax code provisions that have allowed them to lower their capital borrowing costs. The two principal provisions -- the Investment Tax Credit and Deferred Income Taxes -- were eliminated with the 1986 Tax Reform Act. Some of this borrowing is still being amortized across long-lived capital facilities. To the extent that some of these accrued tax liabilities are still on their books, private utilities continue to benefit from the zero-cost capital that these tax provisions allowed all corporations. In 1994 the net value of these provisions totaled about $70.2 million for Washington's investor-owned utilities. They have not been included in these calculations, however, since doing so would have served only to increase the capital borrowing costs of investor-owned utilities. Higher borrowing costs for investor-owned firms would have simply required that public utilities' rates be further increased in order to maintain proportionality.

Technical Note #2 on Cost of Capital

A portion of the subsidies of the cost of capital for government-owned utilities goes directly to their bondholders in the form of income tax exemptions on interest payments received. These direct subsidies are not discussed in this report, since they do not affect the prices charged by public utilities for power and, therefore, do not alter the competitiveness between public and investor-owned utilities. The effect of these subsidies has been calculated and is included in the Technical Appendix to this report, which is available upon request.

Indirectly, corporate shareholders face greater risk when they invest in private utility stocks - with the possibility of losing all or part of their investment if the firm fails. Therefore, investors in private equity securities expect higher returns on their investments and private utilities pay higher costs for the equity capital these investments provide. This greater risk is reflected in the price of a private utility's stock and has been captured in the calculations presented here.

Equity capital available to private firms provides the firm's creditors with a cushion against potential losses. This equity cushion allows a private firm a number of alternatives that are unavailable to public entities. During a troubled financial period, a private firm's creditors know that before the firm will default on its debt payments and risk lowering its credit rating, it will first take steps to reduce the rate of return to equity investors. Possible steps include reducing, suspending, or eliminating dividends to shareholders. Public entities, which rely more heavily on debt capital, do not have this cushion. Rather, taxpayers (and possibly ratepayers) act as guarantors against the potential losses of public entities. A governmental entity can divert funds from another of its functional areas, raise taxes, or raise rates (without going through the long, regulatory approval process required of investor-owned utilities) in order to insulate investors in their public securities from financial harm.

D. Power Pricing Preferences

Although both public and private utilities receive federally subsidized power from BPA in most years, government- and cooperatively-owned utilities depend on it more heavily than Washington's investor-owned utilities and pay less per kWh.

In order to calculate the benefit received from BPA by each of the three types of utilities, we estimate the "full price" that each would have paid had BPA power either not been available to them or been delivered at "full" price. As a proxy for full price, we calculate the average wholesale cost of investor-owned utility power. For non-interruptible (i.e., firm) bulk power at wholesale, this price was 3.36 cents per kWh in 1994.

BPA reported that all power it sold to Washington's utilities in 1994 was firm power: Government-owned utilities paid 1.97 cents per kWh on average; cooperatively-owned utilities paid 1.8 cents per kWh; and, investor-owned utilities paid 3.84 cents per kWh for the BPA power that they purchased. Based on this, government owned utilities received a 1.39 cent per kWh benefit (3.36 cents minus 1.97 cents per kWh) for every kilowatt hour purchased. With approximately 26.4 million megawatt hours (MWh) purchased, government-owned utilities received a total benefit of about $366 million in 1994. This amount is adjusted further to reflect the higher price (i.e., more than "full price") that private utilities paid to BPA in order to receive federal power. As shown in Table 4, in order for government utilities to cover power costs similar to investor-owned utilities in lieu of the low-priced BPA power in 1994, they would have required an additional $385.5 million in operating revenue -- a 16 percent increase in government utilities' rates.

Table 4
Federal Power Expenses
(1994 $ Millions)


Private Utilities City Utilities & PUDs Cooperatives
Total Power Benefit
-$12.322
$365.998
$50.079
Additional Revenue
Required to Equalize
 
$385.512
$51.125
Operating Revenue
$1,645.349
$2,349.713
$91.481
Percent of Operating
Revenue
 
16.41%
55.89%

Cooperatively-owned utilities would feel this particular cost adjustment even more dramatically. With 1.56 cents per kWh benefit and about 3.2 million MWh in BPA power purchases, co-ops received about $50.1 million in preference power benefits. To replace the low-price BPA power with bulk power of the same cost as investor-owned utilities, Washington's cooperatively-owned utilities would have needed an additional $51.1 million in 1994 revenue, nearly a 56 percent revenue increase.

As indicated in Table 4, investor-owned utilities actually paid slightly more for their BPA power purchases in 1994 on a per kWh basis than they spent producing their own.

Technical Notes on BPA's Residential Exchange Program

For a number of years now, BPA has been required to have a program, called the "Residential Exchange Program", that allows residential and small farm customers of investor-owned utilities access to similar rate subsidies as those benefiting public utility customers. The effects of the residential exchange program have been incorporated into this analysis since these effects are included in the financial statement of the investor-owned utilities and reported to EIA. Presence of the program serves to lower the production expenses of the investor-owned utilities. If the residential exchange program had not been in effect in 1994, the average firm bulk power cost of the investor-owned utilities and, thus, the "full price," would have been greater and the discrepancy between investor-owned power costs and government- and cooperatively-owned power prices from BPA, therefore, would also have been greater.

The exchange program allows residential and small farm customers of private utilities to have lower electric rates. Had the residential exchange program not been in effect, investor-owned customers would have had higher operating revenues and expenses and their residential customers would have paid higher effective rates.

E. Subsidy and Exemption Totals

Table 5 summarizes the total value of subsidies and exemptions for government-owned utilities. In total Washington's government-owned utilities received more than $888 million in subsidies and exemptions in 1994. With 1,188,179 customers, this amount translates to subsidies of more than $748 per customer. If government-owned utilities were operating under the same financial conditions as their investor-owned counterparts, they would require a 38 percent increase in rates.

Table 5
Summary of Increases Necessary
to Equalize Competition between
Government- and Investor-Owned Utilities
in Washington State

Government Owned
Total Increases
($ in millions)
Rate Increases
(in percent)
Increases per
Customer
(in $)
Federal Income
Tax Exemptions
$278.337
11.85%
$324.26
Other Tax Exemptions
$140.291
5.97%
$118.07
Cost of Capital Subsidy
$84.153
3.58%
$70.83
BPA Power Preference
$385.512
16.41%
$324.46
Total Gov't Owned
$888.293
37.80%
$747.61

The value of these subsidies for Washington's cooperatively-owned utilities is shown in Table 6. Cooperatively-owned utilities received subsidies totaling more than $65 million in 1994. The 60,790 members/customers of Washington's co-ops, therefore, received subsidies averaging $1,078 each in 1994. Operating under similar financial conditions as private electric utilities would have required co-ops to increase their rates by nearly 72 percent, based on their 1994 experience.

Table 6
Summary of Increases Necessary
to Equalize Competition between
Cooperatively- and Investor-Owned Utilities
in Washington State

Cooperatively-Owned Total Increases
($ in millions)
Rate Increases
(in percent)
Increases
per Customer
(in $)
Federal Income Tax
Exemptions
$7.565
8.27%
$124.44
Other Tax Exemptions
$1.857
2.03%
$30.55
Cost of Capital Subsidy
$4.988
5.45%
$82.05
BPA Power Preference
$51.125
55.89%
$841.01
Total Co-op Owned
$65.535
71.64%
$1078.06

Section IV -- Summary and Conclusions

The numbers speak for themselves. If Washington State's government-owned utilities were subject to the same financial conditions as their investor-owned counterparts, their rates in 1994 would have been 38 percent higher. Similarly, cooperatively-owned utilities in Washington would have rates nearly 72 percent higher. Rate subsidies of these magnitudes are more than sufficient to affect competitive market choices.

In the upcoming competition between government-owned and investor-owned utilities to provide electricity, Washington's private utilities are facing major financial and political challenges. City utilities and public utility districts -- often referred to here as government-owned utilities -- have historically received substantial financial preferences from government. These preferences have allowed them to avoid hundreds of millions of dollars over the years in utility expenses. According to analyses presented in this report, these subsidies totaled more than $888 million in 1994 alone -- an average of $748 in 1994 for each of their customers. Rural cooperatives, where the utility's customers own their own system, have also received these subsidies. Although much lower in dollar value -- about $66 million in 1994 -- they average about $1,078 per customer in 1994.

In the heavily regulated, monopoly environment that has existed for most of this century, preferential policies that benefit selected utilities have not posed such significant problems within the industry as they can now be expected to do. In the competitive environment envisioned by the 1992 Congress, these financial advantages tip the balance against investor-owned utilities and, therefore, away from fair market competition and its benefits for consumers.

In the months ahead, Washington's legislature, the Utilities and Transportation Commission, and the U.S. Congress will be addressing different issues in the continuing process of electric utility deregulation. Part of their debate should include reforming government programs or policies at all levels, so that differential financial treatment of private and public utilities is eliminated and that government policy is competitively neutral. Ultimately,...the very presence of government utilities in a competitive market must be questioned and their governance structure reconsidered.

In an era when governments at all levels are achieving greater efficiencies, lower costs, better service, and improved employee benefits and working conditions through contracted, vouchered, franchised, divested, or otherwise "privatized" public service, the current attempts around the country to "municipalize" electric utility services are perplexing. This report has dealt with the measurable financial discrepancies for Washington's utilities resulting from government programs or policies. But, there are other, less measurable ways in which government ownership presents equity and efficiency concerns. The current ability of public entities to assert political control on marketplace decisions through regulations and permitting decisions, to tax, subsidize, and condemn through their powers of eminent domain, so skew a competitive marketplace that any further expansion of direct government service provision should be vigorously resisted. Jurisdictions that have these sorts of authorities over electricity service in their areas should not be allowed to compete. Ultimately, as we concluded in our earlier report, the very presence of government utilities in a competitive market must be questioned and their governance structure reconsidered.

In Defense

Read a defense of Paying for Power against comments made about it by the Washington Public Utility District Association.

About the Author

Economist Elaine R. Davis has spent more than 20 years in public policy research and program development. She is the author of The Problem with Power: Public Threats to Private Utilities, published by the Washington Institute for Policy Studies in March, 1997.

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