Over at the Austin Post there are two great pieces on the budget by contributor Marius. In one of them, Marius provides interesting evidence that our police expenditure is not optimal for response times relative to peer cities. In another, Marius makes the case for privatizing Austin utilities. Marius concludes:
We see no reason for Austin Energy and other municipal companies to be run by city government as huge departments. The only reason to manage these companies from City Hall is to build empires. In leasing all three municipal companies for the license fee of 6% of the revenues of these companies, we’d immediately gain from $8 million – $29 million in positive contribution to the city budget, depending on the privatization agreement.
In the case of the electric utility, Marius argues that a licensing fee coupled with new property taxes (public utilities don’t usually have to pay those) would net the city additional revenue over the status quo. By the end of this post it should be clear to the reader why this is a problematic metric by which to make a utility privatization decision, but for now, let’s play along.
Marius argues that Austin Energy presently transfers 7.5% of gross revenues to the City. The actual policy goal is 9.1% of electricity base and fuel sales; for 2008 that was 7.5% of overall revenues, but it will be closer to 8.3% in the coming year. You can find this information under the Austin Energy briefing for the City Council here. Why do I bring up the 9.1% electricity receipts number? Well, because if we look at data of how much investor-owned utilities (IOUs) actually pay in local taxes, it is unlikely a private operator would agree to match that number. In the table below I replicate the most recent data compiled by the Association of Texas Electric Companies – the IOU advocacy/trade organization.
As you can see, even including property taxes, IOUs have not historically paid local taxes that would match the current transfer rate. Marius seems to admit this saying he/she had not seen licensing (franchise fee) deals at those rates. “So, what?” you say. “What if the IOUs have higher receipts? That would offset the lower payout rate.” PRECISELY. It’s likely that privatization could lead to higher KwH prices. That’s why looking solely at the revenue transferred into the City is not the best way to look at the value created by a public utility. One has to compare how the whole revenue captured by a KwH sold under a private scheme compares to the public one, since that is the actual product being delivered. And because a public utility doesn’t have to generate profits or market, and has a lower cost of borrowing given its backing by a massive taxing entity, they tend to generate price savings for ratepayers.
It’s not just theory. The American Public Power Association survey has found this, as has Austin Energy itself. Even the Texas IOUs advocacy organization’s data finds that Austin’s rates are amongst the cheapest. If you multiply the average $10 monthly savings of Austin Energy times its 400,000 customers, that’s $48 million a year in customer savings that public power creates. Privatization would need to find a way to maintain both the same general fund transfer AND customer savings to be a break even value.
The likeliest route for the private utility to afford to keep the same low rates, the same general fund contribution, and still generate profits while having a higher cost of capital would be some awesome operational improvements. But as the graph below from the budget presentation points out, that doesn’t seem likely – Austin Energy’s customers per FTE have actually increased as its customer base has grown. Moreover, there is not a lot of public evidence of operational incompetence at the utility, at least not that I could find.
Finally, public ownership creates a variety of public goods that are harder to quantify in dollars but still important. Public ownership allows for greater equity considerations (hence more progressive rates and a focus on low-use affordability.) It allows for greater integration of environmental concerns, so it’s no surprise that public utilities are green leaders. There is greater transparency about decision-making than at a private corporation. And their lack of profit-seeking reduces risks to consumer – it’s no surprise that the California communities that were least exposed to Enron shenanigans had public power.
I think Marius is on the right track in pushing for greater value from our public safety expenditures. But at least from the data I have, it seems that public power in Austin creates more value than privatization.