Power politics: supporters of federal power privatization have learned a lot from failures in the last Congress

"We knew we'd face resistance, but we expected early victories to come easier," says Rep. Scott Klug (R-Wisc.), picked by Newt Gingrich to lead federal privatization efforts when Republicans took control of Congress in 1994. Klug and other privatization supporters knew they had an ambitious agenda, but they thought it was a reasonable one. They didn't set out on a quest for the Holy Grail of privatization, the U.S. Postal Service. Instead, they targeted less-sacred federal relics: the helium reserve, the air traffic control system, and the centerpiece of their agenda, the power marketing administrations.

The five PMAs produce about 6 percent of the nation's electricity, generated from 129 federal hydropower facilities. By law, they are required to sell their wholesale power at below market rates to public municipal utilities and rural cooperatives, which in turn provide electricity to about 25 percent of the nation's retail consumers. Dating as far back as the New Deal, the PMAs were built to provide cheap power to poor, rural areas in the South and West. Today, however, they help electrify Vail, Colorado, Los Angeles, and the true city of lights, Las Vegas. Unlike investor-owned utilities, PMAs don't pay taxes - nor do municipal utilities and most co-cops. They also receive low-interest loans from the federal government - at about 3.5 percent interest, less than what the federal government pays on its debt, so taxpayers eat the difference - and carry an unusually heavy debt burden.

Klug and others thought the PMAs would be an easy sell in Congress. After all, Republicans had the majority and the Clinton administration supported privatizing four of the five PMAs. They were wrong. Their proposal never went anywhere in the Senate - 64 senators voted for a non-binding resolution opposing PMA privatization. Supporters in the House made some progress, but in the end Gingrich, bowing to the inevitable, killed it. Privatization supporters had to lower their sights and revise their timetables. But they learned some important lessons that will make future privatization efforts more likely to succeed.

It's pork, not policy. With every federal program, there are interest groups which are accustomed to their government largesse and will resist any changes to the status quo. The problem with the PMAs is that their beneficiaries are numerous, easily identified, and concentrated in specific regions of the country. Sale proponents were expecting a fight over policy. Instead, they faced special-interest regional politics. The co-op and public power lobbies, the National Rural Electric Association (NRECA) and the American Public Power Association (APPA), organized a letter-writing campaign. Their ratepayers swamped many congressional offices with mail, putting intense political pressure on any wavering members. Even the supposedly free market, revolutionary freshman Republicans put aside petty ideological differences and joined Democrats to fight for cheap juice.

"Republicans from districts with co-ops and munis [municipal utilities] that got power from PMAs fought side by side with Democrats on the issue," says Jerry Taylor, director of natural resource studies at the Cato Institute. "Those socialist bastards in the Clinton administration were more friendly to [privatizing PMAs] than many of the Republicans."

Do your homework. When the Reagan administration first suggested selling off the PMAs in the 1980s, Congress responded by prohibiting federal agencies from even studying the idea. So when the co-ops and munis testified that the PMAs were well-managed and didn't receive subsidies from the federal government, privatization supporters had trouble refuting them. "Many members were predisposed to believe that these programs were run inefficiently, but they didn't have any ammunition," says Bill Marsan of the Alliance for Power Privatization, a coalition of investor-owned utilities, independent power producers, and investment bankers.

During 1996, Rep. John Doolittle (R-Calif.), chairman of the House Subcommittee on Water Power and Resources, began laying the groundwork for future PMA legislation by holding hearings and directing the General Accounting Office to investigate PMA operations. In a subsequent report, the GAO reported that the Western Area Power Administration (WAPA) had failed to recover nearly $500 million in costs. Another GAO report found that 11 of the 23 hydroelectric projects in the Southeastern Power Administration (SEPA) had experienced outages ranging from 30 days to over three years from 1986 through 1995, limiting power production and raising electricity prices.

What's for sale? Current proposals call for selling off only the power-generating facilities of the hydroelectric plants. Sale proponents learned the hard way not to mess with the voters' love of fishing.

For various administrative and financial reasons, in the last Congress the House Resources Committee decided to include the dams, reservoirs, locks, and surrounding federal property in its SEPA proposal. No one really knew how the dams' other uses - drinking water, irrigation, flood control, navigation, fishing, recreation - would be affected, but the opposition gave the public some ideas. Ads aired during Kentucky's gubernatorial race implied that GOD plans to privatize SEPA threatened ordinary folks' right to fish on the river. That didn't go over well with voters. The issue became so heated that GOP candidate Larry Forgy pleaded with Gingrich to pull the bill, which he did in October 1995.

Buy off the opposition. "If buying off customers is necessary to compensate for the transition into the market, we shouldn't let getting the maximum price get in the way," says Robert W. Poole Jr., president of the Reason Foundation.

In other words, forget about auctioning off the PMAs. Yes, it would bring the most revenue to the Treasury - $8 billion to $10 billion for the three midsized authorities - but the NRECA and APPA are adamantly opposed and would mobilize their ratepayers again. (Most residential consumers of PMA power would pay only a few cents more each month because they receive just a small percentage of their electricity from PMA sources, but that point tends to get lost in the lobbying.) Getting the federal government out of the electricity business now is more important than holding out for every last dollar.

The Clinton administration proposed selling four of the PMAs to their current customers at a far lower price, between $4 billion and $5 billion. The NRECA and APPA preferred the status quo, but they grudgingly endorsed the administration's plan as a fallback position. The Alaska Power Administration is being sold in this manner with relative ease. It helped that there has been little interest from private utilities, and that it is by far the smallest of the five PMAs - one Clinton administration official described it as "a couple of dinky dams." But the real difference was that instead of opposing privatization, the local public utilities and co-ops are buying APA's two hydroelectric projects.

Rep. John Shadegg (R-Ariz.), picked by House Budget Committee Chairman John Kasich (R-Ohio) to lead the fight for PMA privatization this year, proposes skipping the co-op and public utility middlemen and compensating individual ratepayers directly. Under his "Popular Privatization" bill, modeled after successful privatizations in the Czech Republic, residential and business customers of the three mid-sized PMAs would be given warrants allowing them to buy their PMA's stock at a discounted price.

These customers could choose to buy shares, but presumably most would sell their warrants to competing companies trying to obtain a controlling interest in the privatized PMA. The average residential ratepayer in WAPA could expect to make $156, Southwestern Power Administration customers, $402. SWPA's average industrial customer would gain over $39,000. All told, ratepayers would profit $3.5 billion, and the feds would clear around $4.5 billion from the sale - and $1 billion in taxes every year.

Shadegg's plan also would transfer federal facilities, dam maintenance, and water management to river associations, composed of farmers, riverfront landowners, environmentalists, fishing associations, and other "stakeholders." Associations would operate on fees paid by the privatized PMA, based on what the federal government required for dam operations. But an association could increase revenue by permitting the power producer to increase water flow through the turbines or increase water flow at peak times. Alternatively, it could buy a reduction in water flow to help salmon runs or to improve water rafting.

Business relationships matter. Some of the most vocal opposition to PMAs in Congress has come from liberal Democrats and moderate Republicans. Why? Because they hail from districts in the Northeast or industrial Midwest that don't receive PMA power. And these parts of the country have energy prices far above the national average. "It's hard to convince energy-intensive businesses to stay in the Northeast or Midwest when they can pack up and move to the South or West and pay much lower energy bills," says Rep. Bob Franks (R-N.J.), co-chairman of the Northeast-Midwest Congressional Coalition. Indeed, thanks to the Bonneville Power Administration, the largest of the PMAs, the Pacific Northwest has attracted much of the energy-intensive aluminum industry.

Klug says he wants more formal ties with the business community, rather than the "ad hoc coalitions" he relied on in the last Congress. A number of investor-owned utilities are eager to buy a stake in the PMA projects. But the industry's priority is to end the government subsidy, particularly as electricity deregulation builds momentum. In the regulated environment, utilities didn't really compete with one another, so PMAs weren't a major issue. But following deregulation of the wholesale power market in 1992 and with California beginning the early stages of retail competition in 1998, investor-owned utilities are more concerned. "You can't have an open market where some are subsidized and some aren't," says the Alliance for Power Privatization's Bill Marsan.

At the same time, deregulation is reducing the PMAs' price advantage, which means that privatization would have an even smaller impact on customers' rates. Competitive prices also could affect the PMAs' ability to repay their large outstanding loans, according to a 1995 GAO report. Bonneville, burdened with a disastrous investment in nuclear energy, already has had to lower its rates to keep several of its major customers from leaving.

It's going to take time. "We thought it was going to be a sprint, but it turns out it's more like a marathon," says Klug. Yet time is on their side. Republicans are confident that they'll hold the House for at least the next four years, and conditions for privatization are likely to improve over that time. In the short term, working on a balanced budget agreement and dealing with entitlement spending may suck up all the political oxygen. (The House Budget Committee may include Shadegg's plan in its budget proposal, but the administration's budget probably will not include any PMA proposals this time, and the Senate remains hostile territory.) But as the deadline for eliminating the deficit approaches, Congress - which presumably will delay serious spending cuts until 2000 or later - will be scrambling to find any sources of revenue. "The budget numbers get so tough that eventually we'll have to sell them off," Klug says.

Critics may chafe at the slow pace of change, but they need to remember that the federal government has had little experience with asset sales. PMA sales will serve as a guide for future privatization efforts. So when privatization proponents move on to the air traffic control system, the Tennessee Valley Authority, or even the post office, they may be able to avoid the political landmines and minimize resistance from the entrenched special interests.

Ed Carson (ELCarson@aol.com) is staff reporter for REASON.

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