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Copyright 1999 The Chronicle Publishing Co.  
The San Francisco Chronicle

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LENGTH: 612 words

HEADLINE: Pulling the Power Plug;

Deregulation needs some help from Congress

BYLINE: Geoff Rothwell

CALIFORNIA MAY HAVE welcomed electric utility restructuring with open arms, but it has a blind eye for the practical problem of how to stimulate the competition necessary for consumers to enjoy the benefits of open markets.

California and other states that initiated reform without federal mandates operated on the theory that deregulation would encourage competition and yield lower prices. But deregulation won't succeed unless Congress reins in federal subsidies that favor some power companies over others. As state deregulators are learning, because of the lack of active federal participation, deregulation has not addressed many of the economic problems associated with government-owned and government-subsidized power, which accounts for one-quarter of the nation's electricity supply.

Publicly owned power companies continue to expand, supported by billions of dollars in direct and indirect federal subsidies. Electric cooperatives and municipally owned utilities, such as the Los Angeles Department of Power & Water and the Sacramento Municipal Utility District, pay no state or federal income taxes.

The Internal Revenue Service has recently issued new regulations that favor the further expansion of government-owned utilities and pose a significant roadblock to California and other states in developing competitive markets. Cities operating electric utilities have been able to issue tax-free bonds to finance electric systems used only by their residents. The new rules permit government-owned utilities to use facilities financed with tax-exempt debt to sell electricity outside their service areas.

Tax-exempt public utilities can now use their subsidized power systems to lure customers away from taxpaying utilities. Increased subsidization of public power distorts the goal of creating competitive markets for power sales. For example, Seattle City Light has a contract to supply power to several department stores in California, and Arizona's Salt River Project now sells electricity to refineries in California. These tax-exempt sales reduce those by taxpaying power generators.

There are other inequities that run counter to fair competition. The Bonneville Power Administration, for example, sells billions of tax-exempt dollars of "excess" federal power to wholesale customers in California. This is particularly significant because publicly owned utilities and power marketing agencies have 13,000 megawatts of "excess" generating capacity, an amount that exceeds the total generating capacity of more than half of the 50 states. Consumers who have access to this power will benefit, but it is a loss of tax revenue that must be made up by the average taxpayer.

To ensure deregulation accomplishes what it was meant to -- stimulate competition and provide a price drop for ratepayers -- three things need to happen immediately. First, Congress should reject the recent IRS regulations and review all tax codes concerning all forms of electric utilities.

Second, Congress should pass legislation that would allow public utilities to compete with private utilities if they are willing to forgo future use of federally subsidized, tax-exempt financing and preferential access to federal public power.

Third, Congress must address continued federal ownership of electricity generation facilities and allow for the possibility of privatizing federal generation capacity.

If Congress gets involved in the restructuring of the American electric utility industry, it can help create effective competition by pulling public power's plug from the federal subsidy socket.

Geoff Rothwell teaches economics at Stanford University.

GRAPHIC: GRAPHIC, Bill Russell / The Chronicle

LOAD-DATE: July 16, 1999