Real-world experiences have shown that costs of switching to public power are high and the benefits are specious, highly uncertain, not well-defined and hard to quantify. New Mexico advocates of public power tend to exaggerate the benefits and understate the costs.
Contrary to the proponents of public power, evidence doesn’t show that public power is greener than private power. For example, the Tennessee Valley Authority is one of the largest polluters in the U.S. Nebraska, which has only publicly-owned electric utilities relies heavily on cheap coal power.
There is also no evidence that public power is more innovative and more capable of gaining financing for new technologies than private power. In fact, public power may find it more difficult to gain acceptance of demanding higher rates to fund new investments in clean energy and other technologies to combat climate change.
For the country as a whole, municipal utilities’ power, on average, have lower rates. But it is not because publicly-owned utilities are more efficient; in fact, municipal utilities typically are much smaller than privately-owned utilities, meaning they benefit less from scale economies. The lower rates for municipal utilities are largely attributable to their lower taxes, access to low-cost federal power and the ability to issue tax-exempt bonds. For New Mexico, somewhat surprisingly, the average residential rate charged by municipal utilities is almost 3% higher than the average rate charged by privately-owned utilities (based on 2020 data compiled by the U.S. Energy Information Administration).
One thing certain is that consumers and taxpayers bear the risk of bad management and other decisions by publicly-owned utilities. A privately-owned utility has no such recourse. It will likely fail to gain a rate increase from the state utility commission - on grounds that it violates the longstanding regulatory principle of “just and reasonable” rates - to compensate for imprudent decisions. The equity owners of a municipal utility are the customers themselves, so the consequence of a poor decision would almost always fall on them.
The road to a new utility is steep and filled with pitfalls, a long and expensive journey that has stalled many municipalities (prime examples are Boulder, Colorado and Las Cruces) that have embarked upon it in recent decades. The community and the utility must set a price for the electric company’s property, a calculation that includes not just the value of poles and wires but also stranded assets, or investments made in capital assets like power plants on the assumption of needing to provide service for a certain number of customers. The purchaser would have to assume the outstanding debt of the private utility, as well. In New Mexico, these costs could total billions of dollars. For a market traded company, the fair market value of equity is pretty settled at the share price. One estimate of PNM’s current debt and fair market equity is around $5.5 billion.
Elaborating on the Las Cruces saga, in 1991 the city council passed an ordinance to create a municipal electric utility. The long, bitter struggle lasted almost ten years until the city council decided to pull the plug. One estimate is that the city spent $40 million in its unsuccessful pursuit after the private utility, El Paso Electricity Company, put up one roadblock after another, and market conditions changed to reduce the benefits from a municipal utility (e.g., deregulation of the electric sector). The city decided (wisely) it was better to spend money on basic municipal services rather than continuing to throw money on a hopeless venture.
One last problem is that switching to public power would cause a revenue loss for local governments. In many jurisdictions, privately-owned utilities are some of the largest property taxpayers.
One must ask: what serious problem exists in New Mexico that would justify switching to public power or even studying it at this time? In fact, public power would likely set back the current efforts to comply with the Energy Transition Act, which established one of the country’s most ambitious clean-energy mandates for private utilities.
Based on experiences in other jurisdictions, even studies showing public power in a favorable light and costing hundreds of thousands or even millions of dollars will not change things because of the real-world obstacles that will stop public power in its tracks. In conclusion, switching to public power or even studying it would miserably fail a cost-benefit test.
Kenneth W. Costello is a regulatory economist/independent consultant residing in Santa Fe.
