The electric power industry generates more than $200 billion in revenue annually. Deregulation and the resulting competition for the American consumers business is creating more choice among electric power users. In Alma, a debate has been raging over whether or not to introduce competition to the local electric power franchise by creating a city-owned and city-run electric utility.
For the last five years the central Michigan city of Alma has been debating a proposal to create a city-based energy provider to compete with Consumers Energy, the highly regulated private, for-profit business that has had a monopoly in the area for 70-plus years. In order to accomplish this the city would need to duplicate the 2,400 utility poles and 41 miles of cable now strung throughout the city at an estimated cost of $20 million, financed over 25 years.
Governments often compete with private business in the production and sale of various goods and services. Some products, however, are closer to the ideal of a "public good" than others. A public good is any good that is "nonexcludable" and "nonrivalous." That is, if someone chooses not to pay for a good, such as national defense, they cannot be excluded from enjoying its benefits anyway. In addition, there is no competitive market to provide for national defense (though components are frequently contracted out). That makes the good nonrivalous.
While the public provision of some goods is unnecessary and counterproductive, others may be more legitimate. What about electric power?
Of course, Alma would have several advantages over its Consumers Energy competition. First, it could fund the $20 million construction by issuing tax-free debt, a privilege not accorded to private firms. Second, an Alma-run utility would not have to account for profit or pay taxes. Consumers Energy on the other hand, must account for profit and please its shareholders.
Alma city officials do not intend to construct their own generators. They simply wish to purchase power from wholesale producers and have it "wheeled" to their community. Wheeling is the transmission of electric power by a utility that does not own or directly use the power it is transmitting. Currently, more than half of Americas 2,000 public electrical utilities do just that. Michigan is home to 41 municipally owned electric utilities.
The charge in Alma to begin its own utility operation is being led by Alma city manager Doug Thomas and a collection of area businesses, Gratiot Community Hospital, and Alma College, all of whom seek lower energy costs. Collectively, these businesses employ 3,500 people and pay out over $93 million in annual payroll. The group is being led by Ultramar Diamond Shamrock (formerly Total Petroleum), which states that 25% of its annual budget ($9 million) goes to pay for electric power. This group of businesses and people, known as Alma Businesses for Electric Competition (ABEC), claims that a city-owned utility operation would save users $61 million over 10 years, even after factoring in the $20 million cost of construction.
Needless to say, Consumers Energy officials disagree strenuously, as well they should. Consumers Energy has spent $685,000 making its case before city government and the people of Alma that they provide the best and cheapest source of energy. ABEC has spent $818,000 defending their positionand probably without good reason.
Last March, the Michigan Public Service Commission directed Consumers Energy and Detroit Edison to begin allowing its customers a choice of providers. The plan is to be phased in over three years. With the ability to wheel in electricity through Consumers, what need would Alma have for its own utility that wheels in electricity anyway?
Simply because a government, at any level, chooses to involve itself in an otherwise private endeavor, does not mean everything will work as planned. In fact, government projects are notorious for big promises and small returns.
In the absence of a profit motive or a "bottom-line," governments dont have the same incentive to come in on time and under budget. Even when they do, time and politics often make these projects painfully inefficient and expensive. Decisions made in a political environment often run contrary to sound economics. In addition, governments often cross-subsidize projects (fund the losses of one project with the "profits" of another), which masks the true costs of well-intentioned operations.
If businesses want to pay less for electric power, they shouldnt be making alliances with government to do it. They should do it the same way they drive prices down everywhere elsethrough competition. Greater consumer choice is what is needed to drive utility costs and prices lower. If Alma residents and businesses believe Consumers Energy is too expensive, they should be able to go shopping for some other firm willing to sell electricity for less. They might even go out of state to find a company that would save the city the expense and hassle of duplicating miles of transmission wires and poles.