Municipalization of Electric Utilities

Thesis: Municipalization of electric utilities is beneficial to consumers.

Our electricity market comprises of two parts, generation and distribution. The generation of electricity is done under a competitive setting, and then sold to retailers at wholesale. However, the retailers who handle distribution are monopolies (Forbes). This is allowed because they are natural monopolies. A competitive setting would mean that multiple transmission lines connect to the same consumer, which would be inefficient. Unfortunately, this would also allow the firms to charge any price. Furthermore, some distributors of electricity also own generation facilities. Obviously, there would be heavy regulations to prevent the abuse of market power.

According to an article on the Wall Street Journal, the profits allowed for electric utilities are capped at around 10% of the shareholder’s equity that they have tied up in transmission lines, power plants, and other assets. Such that the more the firms spend on these assets, the more profits they are allowed to make. And firms are indeed abusing this loophole to increase profits. Electricity utilities are pouring billions into new equipment, even when they don’t need to. And then easily transferring the costs onto consumers because our demand is inelastic and they are a monopoly.

Additionally, heavy regulations have prompted electric utilities to spend obscene amounts of money on lobbying. An article on Forbes lists companies that paid more lobbying than federal taxes, the list is full of energy companies. Firms lobby in order to protect their interests, which is almost always profits. The cost of lobbying is also passed on to consumers.

Private firm’s relentless efforts to maximize profits is ultimately causing another inefficiency through reckless spending on unnecessary infrastructure. One might suggest that we can simply fix this by increasing oversight of firms’ spending activities. However, this could be difficult to achieve and would require resources from the government. Instead, it would be better to municipalize the electric distribution network altogether. Having publicly owned utilities, run by municipal government, would eliminate the need to extract profits from consumers, lowering our power bills.

Reducing the amount we pay for electricity is not the only benefit. As of now, clean and renewable generation such as wind and solar are still unprofitable. Our government has to offer subsidies to encourage firms to build these generators. But it is not enough, as wind and solar only account for a tiny portion of electricity generation. By taking over the industry, we can directly build more of these generators.  Municipalizing generation plants could benefit consumers from an environmental standpoint as well.

 

3 thoughts on “Municipalization of Electric Utilities

  1. Chang Tian

    I think some entities in generation market are also natural monopoly, such as companies run hydro power. Due to geological reason, it is unlikely to form a competitive market in these generation sites.

  2. Alex Rogel

    Would a solution such as you propose raise taxes considerably? What kind of lobbying do you think would convince taxpayers to get on board with a referendum municipalizing electricity.

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