City of Gainesville violates rationale for public ownership of GRU

OPINION

BY LEN CABRERA

The City of Gainesville’s mismanagement and abuse of Gainesville Regional Utilities (GRU) violates the entire premise of public ownership. The economic rationale for a publicly-owned utility is that knowledge of the firm’s costs should lead to lower rates than a regulated, privately-owned utility. Instead, Gainesville has used GRU as a money printing press, driving residential rates to the highest of all municipal utilities in the state and transferring the “evil” profits to fund the City’s utopian schemes.

An economics lesson is necessary for those misled by the previous mayor, who claimed to teach economics.

GRU is what economists call a natural monopoly. A monopoly is a single supplier in a market. Unregulated monopolies are inefficient from an economic perspective because they produce lower output at a higher price than you would get in a competitive, free market. Most monopolies exist by government license (e.g., patents and copyrights) because society has decided that the added product diversity and technological innovation are worth some loss of market efficiency. These types of monopolies are not regulated except by the length of their licenses.

A natural monopoly is different because the nature of the market makes it more cost-effective for a single firm to supply the market rather than multiple firms. Utility companies fall into this category because of the extensive infrastructure required to provide the service (gas, electric, water, cable, etc.). That means the government license is essentially unlimited in duration, so regulation is needed to mitigate the market inefficiency.

However, mandating a price low enough to completely eliminate the inefficiency of a natural monopoly would drive the firm out of business.* The government would have to provide a subsidy, but voters don’t like seeing privately-owned firms get subsidized by government. Mandating a price between the unregulated price and the efficient price is problematic because government regulators do not know the firm’s true costs.

The textbook solution to this problem is to have public ownership of the natural monopoly. This way the government knows the firm’s costs exactly and can set the efficient price while subsidizing the firm through general taxes–and people don’t complain because they get lower utility prices than they would with a regulated, unsubsidized privately-owned monopoly.

What we’ve seen at GRU turns this rationale on its head. Rather than subsidizing the public utility to ensure economically-efficient pricing, the city has operated GRU like a privately-owned, unregulated monopoly, setting higher prices to make monopoly profits and then transferring those profits to the City. They have also purposely driven up GRU’s costs by allowing political priorities for unnecessary green energy initiatives to override sound business practices.

If you pay attention to the City’s stated goals, you’ve heard them say they did all of this for our own good. They are not raising prices simply to increase profits but to make Gainesville a “world-class city.” They need to raise prices to provide renewable energy and save the planet. The resulting profit is just a bonus to pay for all the other utopian schemes like translation services, pedestrian-friendly roads, affordable housing, GRACE Marketplace, etc. According to them, we should be thankful that our self-declared betters are looking out for us.

This is why C.S. Lewis once wrote, “Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated, but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”

The City has abused the purpose and benefits of public ownership of a utility company. They got hooked on the “free” (from the politician’s perspective) money, and like any junkie, they need more to sustain the high. The credit downgrades should have been a warning, but as long as the money flowed from GRU to the City coffers, there was no reason to change anything.

When the Joint Legislative Audit Committee (JLAC) said that if the City doesn’t take urgent action to reduce GRU’s debt, the commissioners could face removal from office or a reduction in state funding, that was the first real wake-up call because it threatened the politicians themselves. If that wasn’t enough to scare these modern-day robber barons straight, the bill proposed by Rep. Chuck Clemons to establish a governor-appointed board to govern GRU definitely got their attention because it will end the money train.

Last week, we finally saw some action from the City to sharply reduce the general fund transfer from GRU. (“General fund transfer” is a euphemism for the City fleecing all of GRU’s customers.) Like most politicians who don’t really plan to change anything, however, they have a 10-year plan, much longer than any of their terms in office. That plan will only reduce the debt-to-capitalization ratio for GRU from 87% to 70%; the average ratio for electric utility companies is 50%.

In that meeting, the commissioners were lamenting the lack of property tax and electric franchise fees, as if that’s an excuse to take money from GRU. If the City wants those fees, let GRU go private and treat them like a privately-owned, regulated utility. Instead, the City wants to keep public ownership so they can avoid regulators and set prices higher to keep funding the government on the backs of GRU customers. They also want to continue to push politically-motivated investments, even if they bankrupt GRU.

Ideally, the solution to GRU’s problems would not require a governor-appointed board. The real solution is for Gainesville citizens to elect rational politicians who know the proper role of a municipal government rather than a bunch of activists looking to fundamentally transform our entire society. Unfortunately, Thomas Jefferson was correct when he said, “The government you elect is the government you deserve.”

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*A natural monopoly has a decreasing marginal cost curve that is always below the average cost curve. Setting price equal to marginal cost results in negative profit. The proof is left to the reader, or you can refer to your favorite economics textbook… a real one that actually uses math.