Electric Utility Briefing Book

Electric Utility Restructuring
Briefing Book

Congressional Research Service Library of Congress
Redistributed as a service of the National Library for the Environment

Public Power

Robert Bamberger

Public power utilities include utilities operated by municipalities and by State and Federal power agencies. This sector accounts for roughly 18% of total net electricity generation and 16% of retail electricity sales. Public utilities and those who are served by them have been concerned about how the sector would be treated in a restructured electric utility industry. At issue has been whether protections and advantages enjoyed by public power will be lifted, and the implications for rates. Depending upon what decisions are made about what a restructured industry will look like, and whether the process is overseen at federal or state levels, it is difficult to predict what the consequences will be for customers of public power, who enjoy some of the lowest rates in the nation.

While electric co-operatives and the Tennessee Valley Authority (TVA) do not neatly fit the technical definition of public power, some argue that these institutions also enjoy unfair advantages over privately-owned, or investor-owned utilities (IOUs). Additionally, some in the past have favored privatization of the four remaining federal Power Marketing Administrations (PMAs) which sell excess power generated by federally-owned hydropower facilities at cost.

TVA is also not subject to regulation by the Federal Energy Regulatory Commission (FERC) and is exempt from U.S. antitrust statutes and from paying Federal taxes. TVA and its competitors are also shut out of each other's service region; this "fence" is likely to be eliminated in any comprehensive deregulation solution.

Public power pays no federal income tax and no state or local income tax (although some public power authorities do make some payments in lieu of taxes). Although some argue that IOUs also receive federal tax preferences, such preferences merely reduce their statutory tax rate, leaving them more heavily taxed than tax-free public power. In addition, state and local power authorities enjoy the use of tax-exempt debt to finance their plants and equipment, which reduces their cost of capital.

These tax or cost advantages of public power have been of concern. Investor-owned utilities believe that the advent of an open transmission network and competition in generation will enable public power to charge lower prices than they do and gain market share at their expense. Since public power's gain would be based upon tax advantages rather than more efficient production methods, the efficiency gains that are the point of introducing competition into the electricity market might be reduced. However, existing tax law may require state and local power authorities to shift from tax-exempt to taxable debt if they choose, or are compelled, to participate in the competitive electricity network. If they are not subject to competition, the economic gains the nation would enjoy from market restructuring would be reduced. (See CRS Report 98-528, Restructuring Electricity Markets, Public Power, and Tax-Exempt Bonds: An Economic Analysis, for a discussion of these issues. For further discussion of related tax issues, see Tax Issues.)

The Administration's Comprehensive Electricity Restructuring Plan, released in April 1999, would prohibit public power from issuing new tax-exempt bonds to finance new transmission and generation facilities. However, municipals could float tax-exempt bonds for new distribution facilities. The Administration notes that the regulatory structure in place recognizes a time when systems, both public and private, operated within defined service territories and when there was little wheeling of power.