Great moments in public sector economics

by Walter Olson on September 20, 2011

I’ve got some observations at Cato at Liberty about the arguments one Montgomery County, Md. councilman has made for a public takeover of local electric utility Pepco — as well as some background about the trade-off often found between leafy splendor and storm-outage resilience in residential settings.

{ 15 comments }

1 Xmas 09.20.11 at 2:50 am

Your links are a little broken in the Cato article…

It’s unfortunate that corporations don’t like to antagonize the politicians that do that sort of thing. If I was Pepco, I’d put up billboards all over the county saying, “Hey, we tried to take care of this before the storm, but this guy stopped us.” I mean, if I was a suicidal corporation, I’d do that sort of thing.

2 Ed 09.20.11 at 8:58 am

I wish politicians were required to take some basic economic classes. There are three problems with this idea:
First. If they take it over by use of eminent domain, they still need to fairly compensate the current owners. Where would they get the money — borrow it with interest and pay it back from future revenues? This will reduce the $200 million in claimed dividends.
Secondly. The assumption is that those dividends go no where. They go into retirement and pension funds, health and life insurance funds, and social group investments. Utilities are considered safe investments. So you would be taking funds from old people.
Thirdly. Not all dividends are paid out. Some are retained to pay for future needs instead of borrowing money.

3 Walter Olson 09.20.11 at 9:04 am

>Your links are a little broken in the Cato article…

Broken links fixed now, thanks for alerting.

4 Hugo S. Cunningham 09.20.11 at 10:28 am

In the past, government-owned utilities and/or their customers have enjoyed tax advantages not available to privately-owned utilities. I do not know if this bias is still in place.
Even the tax advantages, however, are often not enough to compensate for the inefficiencies of political ownership.

5 Ron Miller 09.20.11 at 12:04 pm

I hear you. Ultimately, the Pepco is a slightly different animal for this calculus because it is not a regular player in the free market economy. So the arguments as to whether it should be privately or publicly owned are different.

The idea that the $200 million in dividends is free money for the taxpayers is obviously overly simplistic. I wrote a blog post about this in a similar context yesterday on the issue of whether the city should handle their own litigation in house instead of hiring outside lawyers.

People hate PEPCO and BGE in Maryland after the storm because they don’t have the resources to deal with the rare disaster. But do we really want to pay utility bills that leave them on ready alert for these once in a year type things? My guess is no.

6 John Burgess 09.20.11 at 12:19 pm

My hometown has had municipal power since 1902, when it backed investors to build a power-generating dam across the Connecticut River. It’s expanded into gas and Internet services, though as I no longer live there, I’ve no idea how competitive the rates nor how the would-be competition views them.

As the city alternates between last and second-last place in the MA economics charts, I suspect no one is really looking to push them out.

7 Bumper 09.20.11 at 1:24 pm

Years ago I worked with a company that in a real bean counter epiphany fired all of their in-house counsel except their lowest paid lawyer. The plan was for this last man standing to hire attorneys to defend them as necessary. There was a reason this person was the lowest paid, he was also the least competent, but he knew that cost was the divining factor. So he retained incompetent birds of a feather. The only lawsuit I shared with them we escaped with a hung jury. The only one we came even close to losing in our twenty-five year relationship.

With regard to the post-storm problems, all of the power companies around here, big and small, have interlocking agreements with other power companies around the country to provide assistance in the event of a calamity. If PEPCO didn’t have such arrangements in place then they have more problems than an errant councilman.

8 No Name Guy 09.20.11 at 1:41 pm

Here (Snohomish County, Washington, about 15 miles north of Seattle) we have the Snohomish County Public Utility District. Back in the 70’s, we would have power outages of up to a week after the typical once every 3-5 year wind storm. Day long outages were quite common.

In the 90’s or so, the utility got very aggressive in tree trimming and has been ever since. The longest outage in the last 10 years has been only a few hours. In King County (home of Seattle) there was week long outages just a few years back – the tree huggers there didn’t want the trees cut back and sure enough, after the last good blow, they had a bunch of main, secondary and tertiary lines taken out by branches and falling trees.

Goes to show what you can have when stupid politicians & lawyers DON’T get in the way of forward thinking engineers making sound plans.

9 Ron Miller 09.20.11 at 1:57 pm

You see this in lots of cases. Malpractice and accident cases have very low – relatively speaking – hourly rates because someone along the way decided that you don’t need great counsel to defend the majority of these cases (and, because of volume, more lawyers will offer low rates). I don’t know the wisdom of this logic – in some cases quality of the defense lawyers makes a big difference – but certainly the marketplace agrees that cost is key, evidence by the low rates these insurance companies pay for their outside lawyers.

10 Bill Poser 09.20.11 at 3:40 pm

Speaking as someone from the real Northeast (Vermont), I’m pretty sure that Maryland is not in the Northeast, though it did have the good grace not to join the Confederacy.

11 DensityDuck 09.20.11 at 5:11 pm

Similar issues exist here in the West, where people won’t let you clear brush from your land without getting an Environmental Impact Report done. The result is that brush piles up and dries out, and when lightning hits it the whole thing explodes into huge wildfires.

12 John Burgess 09.20.11 at 8:11 pm

Good grace or the wisdom to acknowledge that a mass of federal troops staring you down is a powerful argument?

13 William Nuesslein 09.21.11 at 9:41 am

Density Duck above has an excellent point. It is my understanding that thinning forests has proven effective in lessening the devastation from forest fires. With sky high unemployment, there is no reason why we can not have crews harvest the fuel that would utherwise heat wild fires.

14 Don 09.21.11 at 10:03 am

My hometown in Idaho owns the local power utility. Power is included on the same bill with water and sewer.

Once upon a time, the power operation was run profitably. This offset the need for higher property tax rates. The result, our community has some of the lowest property tax rates in our State.

But for the past few years, political leadership in our town has refused to run it profitably. It is barely makes a fraction of the revenue it used to make. Their argument, times are tough and we don’t want to hurt seniors. Meanwhile, every other senior in our County is paying the higher Idaho Power rates. At the same time, because of reduced revenues the Mayor has slashed the City budgets until he has cut into real meat. Essential street maintenance has been put off for years, Fire department hasn’t been able to replace an engine for over ten years, Parks aren’t getting the maintenance they need. City leaders are now spreading a lie, that the State’s 3% property tax increase limit applies to all City services, sewer, water and now power.

If a community runs a Public Utility, it can be a good thing, but all it takes is a bunch of bleeding hearts with no business sense to ruin it.

/why yes, I did throw my hat in the ring for City Council this year, so I am putting my money where my mouth is.

15 Matt 09.22.11 at 2:21 pm

I am a lifelong resident of the People’s Republic of Montgomery County and while I think Councilman Berliner, who happens to represent my town of Chevy Chase, is misguided, I do understand the frustration of the County Council and residents alike. Pepco is rated in the bottom quarter of reliability nationally and often experiences power outages on sunny, calm days. A large portion of Pepco power outages are due to faulty relays, substations, etc. My parents, who live in Potomac, cxperience non-weather related outages on a regular basis. Over the last year, I have experienced three multi-day power outages, have spent a small fortune on hotel rooms, and have lost hundreds of dollars of food to spoilage. I am usually the first to come to the defense of companies large and small, and while I oppose socializing Pepco, they have no one to blame but themselves in this case. The shareholders should hold management accountable and demand better performance from the company. If the shareholders do not turn it around, I’m afraid Councilman Berliner and his more left-of center colleagues, such as Councilman Leventhal, will impose their own brand of “reform”

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