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.