Municipalize It? Electric and Natural Gas Utility Ownership in Minneapolis

I just received a “Dear Xcel Energy Customer” letter from my local public electric utility. They are concerned that the residents of Minneapolis may decide, in a fit of civic pride and cooperativism, to municipalize public utilities.

The delivery of service by Xcel is certainly reasonably good (I have power on-demand well more than 99% of the time, probably something like 99.75% of the time), but that last 0.25% (admittedly mostly a “first world problem”) still gripes, and I know it is often “weather related” it is a function at least in part of under-investment. The delivery of natural gas is even more reliable (which I am sure has something to do with their pipes being underground in contrast with most wires). The prices are far below what I would be willing to pay (Ssh, don’t tell Xcel). Thus in general, we have to conclude it is a good service and ask: if it ain’t broke, why fix it. (To which some have replied, if it ain’t broke, break it).

Whether public utilities are publicly or privately provided varies by domain. In the U.S., most pipelines, electric utilities, natural gas utilities, and nearly all telecom and cable utilities are investor-owned, while most transit agencies, around 80% of water utilities and roughly 90% of wastewater utilities are government-owned. Our roads are almost entirely publicly provided by a branch of government.

The evidence on whether public or private utility ownership is better is decidedly mixed. Many studies have failed to show significant differences in performance one way or another.

The downside of private control is their utility status. Public utilities almost by definition are natural monopolies, which have high fixed cost, which makes competition inefficient (more competitors simply spread the high fixed costs over fewer users, driving costs up for everyone). In the absence of regulation, private monopolies have few checks on prices. Further, infrastructure construction and use produces negative externalities, which private firms have no incentive to internalize in the absence of regulation. Thus when there is private ownership, we have imposed utility regulation to ensure this problem is constrained. Here that is handled by the Minnesota Public Utility Commission, whose mission “is to create and maintain a regulatory environment that ensures safe, reliable and efficient utility services at fair and reasonable rates.” The merits of regulation are disputed too. I have earlier noted that “Stigler and Friedland (1962) argue there is no difference in prices in the electrical sector due to regulation, because electricity is competitive with other energy sources in the long run”.

The downsides of public-control are several. Alignment of incentives and reward and punishment for risk-taking are mostly absent from the public sector We don’t expect a lot of innovation or risk-taking in the energy transmission sector (in contrast with energy generation, which is rapidly changing), but it is not clear whether a regulated public utility is more or less innovative than a branch of government. The public sector may be unwilling to charge full costs to users, providing cross-subsidies leading to over-consumption. The evidence for this is in transportation. On the other hand, rates collected by private firms may be easier to justify to the public compared to new taxes or user fees, since of course private firms need revenue. The private sector is less political than the public sector, and less likely to produce “white elephant” projects. Private firms may have less union feather-bedding than their public sector counterparts. Private provision lowers public costs and public borrowing.

In a recent white paper, I advocated Enterprising Roads, that is transforming state DOTs from a branch of state government to an enterprise, a public utility rather than government department model. The ownership initially would likely be a publicly-owned public utility, with possible consideration downstream for alternative ownership (ranging from cooperative to investor-owned).

We should move road operations and maintenance from their statist model to something less political and more technocratic – a publicly or user-owned public utility. We should also seriously consider moving electricity and natural gas to something less profit-seeking and more welfare-maximizing, which would naturally land in the same place – a publicly or user-owned public utility. But we need to be careful if we do this, to avoid the downsides of public ownership (under-pricing, over-building, political interference, high costs) that have beset transportation.

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16 Responses to Municipalize It? Electric and Natural Gas Utility Ownership in Minneapolis

  1. Bill Lindeke
    Bill Lindeke July 24, 2013 at 9:27 pm #

    I’d be nice to push this metaphor farther… If the power company was run like our current transportation system, what would it be like?

    Conversely, if the transportation system was run like our current power company…

    • David Levinson
      David Levinson July 25, 2013 at 8:28 am #

      I expect
      1. If the power company were like DOT, we would have brownouts every-day, which is the analog to congestion.

      2. If the DOT were like the power company, user fees would be much much higher, since they would be determined by the PUC not the Legislature. There would be a very simple version of road pricing in place (it would be more expensive to travel in the peak), and congestion would be much more moderate as a result.

      [WORDPRESS HASHCASH] The poster sent us ‘0 which is not a hashcash value.

  2. Brendon Slotterback
    Brendon Slotterback July 25, 2013 at 7:42 am #

    I haven’t read Enterprising Roads, so perhaps it’s in their, but consider this: whether transportation is a “utility” or not, there is no quasi-public oversight of transportation decisions at the state level. Once a governor is elected, he/she appoints a commissioner and then work happens based mostly on that individuals vision/preferences. There are legislative arguments about funding, but really no publicly accessible process to weigh in on projects. While arcane, you can attend PUC meetings and “comment”, sometimes in person. There are multiple decision-markers, rather than one, often appointed by different governors. EIS processes provide input opportunities, but often these reflect decisions that have been already made. So why not appoint a transportation utilities commission to make big decisions. Staff of the “utility” could present their case to, and respond to decisions of, this body. Does any state do this?

    • David Levinson
      David Levinson July 25, 2013 at 8:25 am #

      A number of states have a strong commission (~19, depending on how you define it) rather than commissioner-> governor DOT. The commission makes decisions, like a Board of Directors.

      My view is to separate the political decisions (new Right of Way, expansion) from routine maintenance and operation, and leave the latter up to the Enterprise, with rate oversight from a PUC.

      See also this working paper evaluating alternative organization forms on performance. Commissions do better than Commissioners reporting to Governors:

      http://www.nexus.umn.edu/Papers/Organizational.pdf

      [WORDPRESS HASHCASH] The poster sent us ‘0 which is not a hashcash value.

  3. Nick Magrino
    Nick Magrino July 25, 2013 at 9:25 pm #

    I feel like I want to have a strong opinion about this, but can’t bring myself to do so.

  4. Nathaniel M Hood
    Nathaniel July 25, 2013 at 11:19 pm #

    Xcel CEO threatens Minneapolis http://www.startribune.com/local/minneapolis/217034911.html

  5. Nathaniel M Hood
    Nathaniel July 25, 2013 at 11:23 pm #

    I think it’s an empty threat. It’s hard to imagine they would build a new 9 story office building and just ditch town. http://www.twincities.com/ci_20892711/new-building-will-expand-xcel-minneapolis-headquarters / Not sure if it’s under construction yet?

    • David Levinson
      David Levinson July 26, 2013 at 7:31 am #

      I don’t think its an empty threat, at least some of that space is surely for employees dealing with Minnesota, not just generic HQ functions. Why would they stay? It would be terrible for morale. They could easily flip the real estate. I hear the Strib is looking for space.

      However all city-serving employees would be replaced. Its the staff dealing with HQ functions that would be a net loss for Minneapolis.

      Perhaps the City should just buy shares in Xcel Energy, and get a seat on the Board. A share of profits (dividends) would be returned to the city.

      There is nothing which requires 100% ownership be within arbitrary municipal limits in order to get what you want in a negotiation.

      • Nathaniel M Hood
        Nathaniel M Hood July 27, 2013 at 10:47 am #

        Interesting thought. City has a shareholder. My one thought is that of a conflict of interest; being that Minneapolis would financially benefit from rate increases which may not be in the best interest of its citizens. Of course, I think most rates are dealt with at the State level. I’m not sure of the role of City (anyone fill me in?)

      • Brendon Slotterback
        Brendon Slotterback July 30, 2013 at 8:14 am #

        Being a shareholder or even board member probably wouldn’t make a difference. Generation mix, rates, service territory and even rate of return on equity are all determined by the PUC.

    • Brendon Slotterback
      Brendon Slotterback July 27, 2013 at 8:45 am #

      They won’t own that building, they would be a tenant.

      • Nathaniel M Hood
        Nathaniel M Hood July 27, 2013 at 10:49 am #

        Thanks. Quick question: what is going to happen with the existing HQ upon a move within Minneapolis? Actually, I’ll check over at UrbanMSP …

        • Howard August 22, 2013 at 1:57 pm #

          Xcel is just consolidating offices downtown into the existing HQ building and the new one (To be built) creating a mini campus. Currently they have space in the old Federal Reserve building.

  6. Jeb July 28, 2013 at 2:30 pm #

    There are quite a few smaller cities that seem to do quite well with municipal power. I live in one of them, and my power is out no more than it was at home, and I haven’t had any brownouts.

    Most municipal power utilities get their energy from a wholesaler (after all, there aren’t too many cities that can make their own electricity 24/7…) The city here uses Missouri River Energy: http://www.mrenergy.com/. Our power rates are still reasonable – around 8c/kWh.

    Basically – municipal power can work and works in other towns. It actually works better than most other governmental duties, surprisingly.

  7. Matt Look July 30, 2013 at 1:59 pm #

    Keep in mind that municipalities are not required to meet the wind power mandate. Power companies will be quick to dispel the rumor….they lose money by meeting this mandate. It will never pay for itself. If your goal is dependency on government, drive an agenda that forces power companies to sell to cities, or lose money operating. Socialism anyone?

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