A Cautionary Tale on Municipalization
Daniel, David, Gegax, Douglas, Forum for Applied Research and Public Policy
After a long, bitter fight against El Paso Electric Company, the city of Las Cruces decided not to municipalize.
Deregulation of the electricity industry offers customers in many states the chance to get a better deal. No longer bound to incumbent generators of electricity, which are typically investor-owned utilities, customers are free to shop the power market in search of lower rates.
Deregulation, however, is not the only path available to get rid of the incumbent. Across the nation, municipalities are going a step further and forming their own electric utilities by acquiring distribution systems and securing alternative generation sources.
Las Cruces, New Mexico, was almost one of them. Rising costs, unexpected obligations, and changes in the regulatory environment, however, ultimately prompted Las Cruces to settle its fight with the local incumbent utility and cease its efforts. For cities and towns contemplating municipalization, the experience of Las Cruces is highly instructive.
The conflict between Las Cruces and El Paso Electric Company--the investor-owned utility that serves the Las Cruces area--began nearly 30 years ago, long before deregulation. In the mid-1970s, EPE--along with six other utilities from New Mexico, Arizona, and California--decided to invest in the Palo Verde Nuclear Generation Station, which was to be built near Phoenix. EPE reasoned that it had little or no excess electricity generation capacity, it faced increasing demand for electricity in its service area, and it projected a continuation of high prices for oil and natural gas, which were the fuel sources for alternative electric generation technologies.
The pro-nuclear sentiment of the 1970s, of course, was not limited to EPE. Across the nation, utilities in dire need of new generation capacity at that time viewed nuclear as the best investment. A national desire to be independent from Mid-east oil producers while addressing environmental concerns about coal-burning generation plants also bolstered the wave of nuclear investment proposals. 
Nonetheless, the city of Las Cruces opposed the Palo Verde investment, believing that EPE's estimate of future demand for electricity was high, as was its future price estimates of oil and natural gas. City officials were also concerned that EPE had not recognized future energy-conservation technologies that could reduce electricity consumption, and that rate increases would be required to cover the costs.
As it turned out, the city was largely correct. Demand did nor increase dramatically because population growth in the area did not reach EPE's projections. Moreover, uranium mines in the area that had boomed during Palo Verde's planning stage--and were themselves enormous consumers of electricity--shut down as the uranium industry collapsed, and conservation efforts by homeowners and businesses reduced the need for generation capacity.
Nevertheless, construction proceeded--albeit with delays and unexpected surges in interest rates that led to cost overruns--and Palo Verde came online in 1988. In the end, however, the huge cost, coupled with lack of demand, meant that EPE was unable to sell enough electricity to cover its investment. Consequently, electricity rates began to soar. Because Las Cruces' contract with EPE was to expire in 1993, city officials began investigating alternative sources. The Las Cruces city council subsequently passed an ordinance in 1991 to establish a municipal electric utility. 
As with most municipal electric utilities, the city's plan called for Las Cruces to own the local distribution system--which it would purchase from EPE--but not an electric-generation plant. Consequently, the city would have to buy wholesale power and arrange for its transmission from the wholesaler's generation plant to the city's distribution system.
In 1994, the city signed with Southwestern Public Service Company to supply power and to operate and maintain the distribution system. …