Policy Study

Federal Power

The Case for Privatizing Electricity

Executive Summary

The federal government is the nation’s largest producer of electric power, via the Tennessee Valley Authority (TVA) and the five power marketing administrations (PMAs). These electricity businesses, along with the numerous federally subsidized cooperatives and municipal utilities, are poorly managed, inefficient, and at considerable risk in the emerging environment of electricity competition.

Two dozen other countries recognizing similar problems with government electricity provision have launched ambitious electricity privatization programs. Participating countries include highly developed nations such as Australia, Britain, Canada, and Germany; developing nations such as Argentina, Brazil, Taiwan, and Thailand; and former communist countries such as Hungary and Poland. In 1995 electricity was the largest category of privatization worldwide, with $13 billion in sales volume. Over the past decade over $35 billion of government electricity corporations have been privatized worldwide.

Other countries have privatized electricity for two main reasons: 1) to improve the efficiency and performance of their electric power industry, particularly as competition in this sector emerges, and 2) to raise capital to reduce their national debts. Both objectives are equally applicable to the United States, but the U.S. federal government has yet to divest a single electric power asset. The Clinton administration’s FY 1996 budget called for the privatization of the four smallest PMAs, but this initiative stalled in the 104th Congress, and congressional calls for privatization of the larger TVA and the Bonneville Power Administration (BPA) also have been rebuffed.

Privatizing federal electricity and ending current subsidies would have the following benefits:

  • Sale of federal power enterprises would raise $15 30 billion, which could be applied to reducing the national debt.
  • Total direct subsidies to government-owned utilities and cooperatives of about $7 10 billion per year would end. Of this total, $3 billion per year is lost government revenue due to the sale of preference power at below-market prices.
  • Privatization would lead to substantial gains in efficiency and performance by the privatized utilities. Government-owned utilities worldwide suffer substantial operational problems and face political interference in management and investment decisions, which can be solved by the shift to investor-ownership.
  • Putting the transmission grids of the TVA and the PMAs into the emerging competitive market would help promote efficiency and lower electricity prices for all Americans. There is no good reason for the Federal Energy Regulatory Commission to treat these transmission assets differently from those of investorowned utilities.

Privatization and the end of electricity subsidies could be a win-win proposition. First, existing subsidies are grossly inefficient; about half of the subsidies that flow through various government-owned utilities and co-ops don’t reach the final consumers. Thus, a well-crafted privatization which provides these consumers with modest transitional protection from rising prices might push aside remaining consumer resistance. Second, environmental interests are not well served by government involvement in the electric power industry. Below-market pricing increases energy consumption and pollution; privatization legislation also offers an opportunity to reconsider the licenses on environmentally sensitive federal hydro facilities. Third, opening up all transmission access to competitive power delivery will expand price competition, benefiting electricity consumers nationwide.

At a time when President Clinton acknowledges that the era of big government is over and that government cannot solve all our problems, it would be sensible to begin this transition by eliminating the federal government’s damaging role in our nation’s power markets. In particular, the continued government ownership of the TVA and the PMAs outdated legacies of the era of big government can no longer be justified in the context of the president’s framework.