Utilities Takeover by Cities a Mistake

Lower bills, increased revenue is a mirage

No sooner have San Francisco voters turned down for the second time the idea of the city taking over the local electric utility than the idea pops up all over California, Florida and other states. In many places, consultants have come to town touting the benefits of having the city force private utilities to sell them their assets. And of course hire the consultants to help with the process.

Proponents of “municipalizing” utilities make big claims about new revenue for the city and lower electricity bills for residents. But the truth is whole other kettle of fish.

First, municipalization is a long, contentious, litigious, and costly process. In California, the city of Corona has spent nearly $1 million so far in just getting ready for the process. The direct buyout cost will exceed $300 million including interest. Long Beach turned down municipalization not long ago when they saw the $500 million price tag.

Then add on the costs of lawyers, and be prepared to wait a long time to see any benefits. In 1987, Las Cruces, New Mexico decided to municipalize their privately owned utility. Thirteen years, dozens of lawsuits, and untold dollars later, the plan fell apart. The one sure thing in this process is litigation and local taxpayers supporting the lawyer full-employment plan.

With the state budget crunch meaning big cuts in revenue for local governments, cities are looking at cutbacks in healthcare and education. The money it takes to buy out the local electric utility can buy a lot of basic local services.

A second truth about municipalization is that people should not be fooled into thinking that a city takeover of electricity will mean low costs. Again in California, local officials in the cities of San Marcos and Palm Springs were outraged when cost savings estimates provided by consultants early on turned out later to be much too high. As for electric bills, municipal utilities do tend to charge less to residential customers, but they charge more to businesses. City residents pay for it one way or another.

Municipal utilities have suffered less from wholesale price variations, thanks to federal preference power, but in many states their prices are still way above the national average. Where electricity prices are falling is in states like Pennsylvania and Texas that did not botch their deregulation plans.

Finally, municipalization is such a bad idea, the rest of the world is going the opposite direction. Literally scores of countries are selling their municipal utilities, from Brazil to Oman, and from Australia to Germany. The UK sold all of its electric utilities in 1990 and the results have been falling prices, increasing safety, and increasing service quality.

In the US more utilities have been privatized than municpalized in recent years. Fairbanks, Alaska sold its utility last year, and the Department of Defense has sold dozens of electric utilities on military bases and is in the process of selling more. There are about 1,000 towns and major cities with franchise arrangements with private electric utilities. Since 1988, fewer than 10 have tried to municipalize them, and some of them are still bogged down in red tape.

Outside the United State, only Cuba is embracing government electric utilities.

Any one of these issues should give one pause about municipalization. Together, they show that municipalization is bad policy.

Adrian Moore is Vice President of Reason Foundation.