Economy Education

Shift Burden of Financing Schools to Private Sector


The recent agreement between the Albuquerque Public Schools and the Home Builders Association of Central New Mexico was a real head-scratcher for several reasons.

After all, who gave the home builders and the school district the power to tax? Even if this action is found to be legal, a questionable proposition at best, $2,000 per new home seems rather arbitrary (the number will rise to $3,000 in the third year). What exactly are the home-buyers who will ultimately pay this new tax getting out of the deal?

Some would argue that forcing new homeowners to pay for new schools is similar to a “user fee” because new homeowners demand additional services. But, this is not the case because buyers of new homes pay the same taxes as everyone else. It is simply not fair to charge retirees (or anyone else without kids in public schools) yet another tax, simply for the “privilege” of purchasing a newly-constructed home.

Nearly as important as the fairness question is whether the schools really need the money they say they do. APS claims it needs an astounding $1.7 billion for two new high schools on the West Side and renovations to existing school buildings. Rather than simply raising taxes though, with a little creativity, APS could avoid this tax increase and transform schools into thriving community centers that can be used on weekends and during summers.

The key is to put an incentive structure in place that creates maximum benefits at a minimal cost. This can most effectively be done by shifting the burden of financing new schools to the private sector. It works like this:

# School districts ask private developers to bid on a contract to construct (or renovate) a school from start to finish.

# The district converts the cost of the project into a 20-year lease with annual rent payments equal to 85 percent of the cost of the project (based on the winning bid).

# The developer completes the school with furnishings (such as desks and chalkboards), computers, administrative offices, landscaping, and athletic facilities.

# The district effectively gains use of a school building for 15 percent less than it would cost to construct on the district’s own accord.

Private developers receive an additional bonus: They get control of the buildings and classrooms when they are not in use by the school. During evenings, weekends, and (possibly) summers, the developer may lease classrooms to for-profit trade schools and approved civic, political, or religious groups.

Projects like this have been undertaken in Florida, Nova Scotia, and Britain. APS should consider similar financing efforts both for constructing new schools and renovating existing schools.

An additional way to cut school construction costs is to exempt public school construction projects from New Mexico’s Davis-Bacon “prevailing wage” law. If the Legislature were to approve such a measure, taxpayers and school districts would likely save an additional 15 percent on school construction.

A 1995 study by the National School Boards Association demonstrated that over 60 percent of school boards found that federal or state Davis-Bacon laws had increased the cost of a recent construction project, and over half had increased as much as 20 percent.

Lastly, Albuquerque must work in concert with the governor and Legislature to better rationalize its school funding system. If East Side taxpayers refuse to pay for new schools on the West Side, perhaps the district should be split in two. And, rather than pouring taxpayer money into the construction of additional schools, perhaps money should be given to parents themselves so they can decide whether charter, private or traditional public schools are best for their child.

Throwing more money at Albuquerque’s troubled school system is not a recipe for success. Instead of abdicating their taxing authority to APS, our elected officials need to come up with innovative ways to save money.

The Rio Grande Foundation is an independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Economy Energy and Environment Oil & Gas

Drilling for Votes: N.M.’s Representatives in Washington Have No Business Accusing Big Oil of Price Gouging


Price gouging can be defined as “pricing above the market when no alternative retailer is available.” Sure, gas prices are higher than most of us might like, but this recent talk about collusion among oil companies to gouge consumers is rubbish, and our elected officials know better.

Unfortunately, rather than admitting their own recent mistakes are at least partially to blame for high gas prices, Sens. Pete Domenici and Jeff Bingaman, along with Rep. Heather Wilson, are pointing their fingers at big oil.

First, the facts on so-called price gouging. Unlike the U.S. Postal Service, Amtrak and public schools, oil companies face real competition. Why else would gas stations display their prices so publicly? If these companies could really manipulate prices at will, why wouldn’t they have colluded to sell gas for $3 a gallon five years ago, when prices were low?

In a competitive environment, if you choose to purchase a product or service from someone, whatever the cost, price gouging is simply not taking place. If it were, then those of us who purchased homes when prices were low and are planning to sell for double and even triple the original price are gouging, too.

The real wild card is, of course, Congress. While talking up the gouging issue, our elected officials seem unwilling to face up to their own mistakes, so they have chosen to demonize the oil industry.

In an effort to promote policy solutions instead of useless name-calling, New Mexico’s congressional delegation, especially the ringleaders on price gouging – Domenici, Bingaman and Wilson – should consider the following ideas provided by the Competitive Enterprise Institute:

Open a small portion of the coastal plain of the Arctic National Wildlife Refuge to oil and gas production. If there is as much oil as the U.S. Geological Survey’s estimate shows, this would increase America’s proven domestic oil reserves by approximately 50 percent. There is majority support in both the House and Senate for opening the refuge, but an obstructionist minority blocked enactment last year. The Senate again voted 51 to 49 earlier this year to open the refuge.

Open the Pacific, Atlantic and eastern Gulf of Mexico offshore areas to oil and natural gas production. America’s deep-sea reserves are potentially enormous, but – except for the western Gulf of Mexico, which is the United States’ largest producing oil field today – they have been put off limits by the federal government. Environmental concerns about deep-sea production are unwarranted. The last significant offshore oil spill in the United States was in 1969. Hurricanes Katrina and Rita last summer destroyed many oil rigs and platforms in the gulf but did not cause any significant spills. Congress should enact legislation this year to open offshore areas currently under moratorium and share federal royalties 50-50 with the states involved.

Repeal the new ethanol mandate included in the energy bill passed last year. The new mandate requires refiners to double their 2005 use of ethanol to 7.5 billion gallons per year by 2012. Higher demand is causing ethanol prices to soar. The mandate will require 22 percent of the U.S. corn crop to provide 4 percent of gasoline supplies. Repeal the current 54-cents-a-gallon tariff on imported ethanol. Domestic ethanol producers already receive 51 cents per gallon in federal subsidies. They don’t need any more protection.

All-too-often, our elected officials look for short-term electoral gains at the expense of sound policy objectives. We are now reaping the consequences of an energy bill that has failed economically and politically. Rather than enacting unwise price-gouging legislation, New Mexico’s elected officials should use their influence to promote a healthier debate focusing on real solutions.

Gessing is president of New Mexico’s Rio Grande Foundation, which describes itself as an “independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.”


ACORN’s Agenda Falls Far From the Local Tree

Albuquerque’s City Council is now considering whether or not to pre-empt an expected ballot measure campaign by the Association of Community Organizations for Reform Now (ACORN) on behalf of a $7.50 minimum wage for the city.
Given the mountains of economic evidence that government wage mandates harm economic growth, some elected officials are uncomfortable voting for a higher wage. Perhaps that is why Mayor Martin Chávez and several city councilors have, when pressed on the issue, passed the buck off to Congress, indicating that minimum wage rates are a federal responsibility.
Unfortunately, since ACORN already came close to success at the ballot box last year, Albuquerque politicians and the city’s Chamber of Commerce are working to pre-empt ACORN by passing their own “reasonable” minimum wage hike.
But bowing to ACORN’s demands without so much as a fight is exactly what this radical outfit wants and, like an unruly child who throws a tantrum until his parents give in, ACORN will view this “compromise” as a sign of weakness. It will quickly move to impose the rest of its far-left agenda on Albuquerque residents and businesses.
First and foremost, ACORN and its activists are, by and large, not locally based, so most of them don’t really care what happens to Albuquerque’s economy once they have their “victory.” ACORN was founded in Little Rock, and has offices spread around the country and Latin America.
While portraying itself as a humble advocate for the poor, ACORN actually promotes an agenda of anti-capitalism, central planning, victimology and government handouts.
ACORN’s political agenda includes unionizing welfare recipients, micromanaging banks’ lending practices under a federal law known as the Community Reinvestment Act, and passing laws to prohibit foreclosure, according to its Web site. Not only does ACORN wish to make doing business in big cities more difficult than it already is, it would like to trap businesses should they wish to leave, according to the site, It proposes forcing them to obtain “an exit visa from the community board signifying that the company has adequately compensated all its employees and the community at large for losses due to relocation.”
ACORN is not even consistent when it comes to the group’s own radical notions of right and wrong. In fact, the group regularly takes actions that appear blatantly self-interested or hypocritical, as if its pure motives and laudable ends might justify less-than-elevated means. For example, even while pushing for living-wage legislation in California, ACORN was paying its workers less than the existing minimum wage — and arguing when the state sued it that the minimum-wage law infringed its First Amendment free-speech right, since paying workers more would hinder it in spreading its message.
The main factor in ACORN’s success is that local interest groups like the Albuquerque Chamber and local politicians lack the courage to stand up to the group. Instead, faced with the threat of Jesse Jackson-style direct-action, corporations often give generous donations to the group in order to buy peace.
In the same vein, rather than forcing ACORN to organize and run costly campaigns, local governments often cave to the group’s pressure by pre-emptively giving in to a majority of their demands.
If Albuquerque’s City Council caves to ACORN’s demands, they certainly won’t be the first to do so. But if they tell the group to take its recipes for urban decay elsewhere, they will be defending the interests not only of small businesses, consumers and taxpayers, but of those on the very bottom rungs of the economic ladder. For them the only alternative to working for unskilled wages is unemployment.
ACORN doesn’t really care what happens to Albuquerque, so we’d better start caring ourselves.
The Rio Grande Foundation is an independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Human Events Panel Chooses ’10 Worst Government Programs’

Recently, I had the privilege of serving on a panel convened by Human Events Magazine that was assigned with the task of naming the 10 worst government programs. Other panelists included such luminaries as Larry Kudlow of Kudlow and Cramer fame, Walter Williams, one of the best-known economists in the country, and former House Majority Leader Dick Armey (among others) . The votes are now tallied and here is what we came up with. This was a weighted vote that included some 50 federal programs. I don’t necessarily agree with all of the panel’s choices, but it is a good listing and should provoke discussion.


Federal Spending Hinders New Mexico Economy

The humorist Will Rogers once said, “Be thankful we’re not getting all the government we’re paying for.” When it comes to federal spending in New Mexico, we’re not only getting all the government we’re paying for, we’re getting more.
This trend was revealed in a recent report by the Washington-based Tax Foundation. The study analyzed the distribution of federal spending on a state-by-state basis and found New Mexico to be the nation’s single greatest recipient of federal spending relative to how much the state’s taxpayers send to Washington in federal taxes. According to the study, New Mexico receives $2 in federal funds for each $1 we pay in federal taxes.
Some would say that New Mexico’s status as a net recipient of federal spending is a good thing. Our elected members of Congress might even say it is a sign that their efforts to bring earmarks and federally funded projects home (the Air Force’s recent decision to station the FA-22 fighter jets at Holloman Air Force Base being one recent example) are paying off for their constituents.
There are, of course, many reasons for New Mexico’s disproportionate level of federal largesse. The state has a number of military installations, scientific and research facilities, and as a western state, it is home to several National Forests and Parks. Thus, thousands of New Mexicans are employed in various federal jobs within the state. While these high-paying jobs might seem like an obvious economic boon to our economy, an analysis by the Rio Grande Foundation found that high levels of federal spending in a given state actually correlates with weaker economic growth.
Specifically, while our neighbors in Colorado and Texas receive less from the federal government than is taken from their taxpayers ($0.79 and $0.94 per $1 in tax respectively), Colorado’s gross state product (GSP) per person (the total market value of all the goods and services produced within its borders during a specified period) is 11th in the nation and Texas ranks 20th, New Mexico’s gross state product, on the other hand, is 44th in the nation per person. Since productive economic activity closely mirrors the creation of wealth and higher standards of living, Coloradans and Texans enjoy higher standards of living than New Mexicans even though the federal government takes from them and gives to us!
The trend of federal money flowing to poor states and out of wealthier states is not limited to the west. Vermont and New Hampshire are similar in geography and resources, yet New Hampshire receives $.67 for every dollar it sends to Washington while Vermont gets back $1.12. Despite this, New Hampshire has the 17th-highest GSP per person while Vermont lags behind in 35th place.
While federal transfer payments in the form of welfare and Social Security do skew the data somewhat, stark differences also illustrate two development patterns, one that relies on outsiders for support and another that derives wealth and economic strength from within. In a government-driven environment, benefits are limited to recipients of government largesse while innovation and entrepreneurship are not cultivated. In a low tax, low regulation environment, on the other hand, creativity is nurtured and the benefits of this creativity are spread throughout the economy.
Colorado, Texas and New Hampshire are wealthier than New Mexico due to their economic policies. Coloradans strictly limit state spending and taxes under their constitution, while Texas and New Hampshire lack prosperity-sapping income taxes (New Hampshire goes Texas one better and also refrains from taxing sales).
New Mexicans have little or no control over the location of military bases, Indian reservations and other national lands, but we must disavow ourselves of the notion that federal spending contributes to prosperity. We can get off the dole and improve our economy by passing our own constitutional taxpayer protections and eliminating taxes on income. The sooner New Mexicans realize that there is no such thing as a free lunch, the better off we’ll be.
Paul Gessing is the president of New Mexico’s Rio Grande Foundation, an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.
Economy Local Government

State Treasurer’s Office Needs a Dose of Free Market Principles

The multi-million dollar scandal in the state Treasurer’s office opened the door to much needed reforms. The problem is not merely some sticky fingered officials, but rather the way the operation ignores some obvious lessons of economics. Incentives really do matter.

The most straightforward and obvious reform would be to make the job of treasurer appointive rather than elective. This would prevent a repeat fiasco of an indicted Treasurer who can’t be fired except by impeachment. This change would also open the job up to financial experts who don’t want to run for office. Moreover, it would make the governor share in the responsibility for any further corruption, giving him a greater incentive to oversee treasury operations.

But more reforms are needed to eliminate what was the main vehicle for corruption, namely the dependence on “consultants” who compete for the chance to collect fat commissions and hence can be pressured into giving kickbacks to the Treasurer. With kickbacks adding up into the millions of dollars, one can only imagine just how much money has been forked over in consultant fees.

Given the tremendous competition in securities markets, it is doubtful that these consultants have any profitable advice to offer. How great could these consultants be if they find it expedient to bribe their way into business deals? But even if they were honest, their advice isn’t going to be worth much.

Burton Malkiel’s classic book, A Random Walk Down Wall Street, explains why stock pickers almost never outperform the market, and his analysis applies in spades to the motley crew of consultants picked by shady state officials. Information flows so quickly in the stock market that any piece of valuable information almost immediately is absorbed into the price of related securities.

Much of the work of the office is simply to manage short term income and outgo of monies. Rules of operation should be established, so that when the state has, say, $20 million to invest for 30 days the rules say “buy U.S. Treasury bills.” No, or very small, commissions, no self-serving portfolio-churning tips from consultants, and a sure rate of return. Treasury securities don’t have the pizzazz of whatever the consultants have probably been pushing, but they are as safe as you can get and tend to move with inflation.

Another way to dispense with consultants is to build more expertise within the Treasurer’s office (but without a net increase in the size of the staff). Former Governor Johnson was quoted as saying that the office would do fine with half as many people. If outside advice is really needed, then sign up with one reputable nationally known company on a negotiated fee-for-service, non-commission basis.

The spirit of these reforms also applies to the state investment officer and council with a few modifications. A sizable portion of the permanent funds under their management is in long-term investments. Again, hiring a whole raft of consultants makes little sense. Rather, go with one or two big investment firms like T. Rowe Price or Vanguard, and stick to their broadly based index funds of stocks and bonds.

Above all, resist the pressure to “invest” in New Mexico firms for some nebulous goals of economic development or jobs creation. The payoff will be slim or negative. Any firm that can’t attract funding in the private market is unlikely to be a sound investment of taxpayers’ money. Moreover, such an investment strategy is a magnet for favoritism and corruption on a large scale. (And in this context, the word “invest” probably should be replaced by “spend” or “squander.”)

In summary, organize the treasurer’s office and the investment council in a way that takes out the incentives for corruption, and taxpayers will get at least a little more of the good government they deserve.


Really want to harm the poor? Try the ‘Living Wage’

The proposal for a “living wage” is an ineffective way to help the poor. In fact, it is more likely to harm the poor. The reasons why are grounded in fundamental economics.
You don’t have to be an economist to understand that “living wage” proposals do not meet the test of common sense. Why not raise the wage floor much higher than is proposed? For example, why not raise the wage floor to $100 per hour? It does not take much reflection to understand that $100 per hour wage floor would not work. Why is it that common sense fails when the proposed wage floor is a mere $7.15 per hour? Principles of economics textbooks show clearly that wage floors result in surpluses of workers (unemployment). How does being unemployed help the unskilled poor? Actually, the wage floor for those unlucky persons who can’t find work as a result of the wage floor is ZERO dollars per hour. ZERO is the actual wage floor; and there is nothing government can do to prevent it. Unfortunately, minorities are more apt to find themselves in this situation as a result of “living wage” laws.
“Living wage” will be quite ineffective at helping the poor, even for the lucky workers who do find jobs. Firms will always find ways around the wage floor. The market for unskilled labor is highly competitive. As a consequence an unskilled worker’s effort must result in value of product equal to the worker’s total compensation, including that part of compensation that goes to training.
One way around the wage floor is for the firm to substitute capital for labor where possible. Repetitive tasks can often be automated in some way. A second way around it is for the firm to substitute higher wage for lower benefits where possible. It is the total compensation package that matters; and the firm will have wiggle room when that package includes non-wage benefits. A third way around it is to substitute non-wage labor for wage labor where possible. For example, the firm may move to piece rate compensation or contract separately for the needed function. A fourth way around it is to move outside the wage floor jurisdiction where possible; and potential firms can choose not to locate within the wage floor jurisdiction. A fifth way around it is to reduce or eliminate training of the unskilled where possible. At the higher wage floor more skilled workers will be attracted to previously unskilled jobs. If these ways of coping with the wage floor are not available, the firm can go out of business.
Much of the “living wage” argument is fueled by what proponents cite as evidence that it works. Unfortunately even a few economists have tried to prove in effect that water flows uphill. Prime among these has been the study by economists D. Card and A.B. Krueger (1994). David Neumark summarizes that study and the avalanche of evidence refuting it in his research summary “Raising Incomes by Mandating Wages.” Even though Card and Krueger have been thoroughly refuted, wishful thinkers advocating living wages continue to cite them as “proof” that water flows uphill. Fortunately, the vast majority of economists do not agree with them.
Some have claimed that the higher living wage will be spent, thereby stimulating the economy. This is pure nonsense; the higher wage floor will actually have a depressing effect. The money that goes to pay higher wages has to come from somewhere, such as from company profits or from consumers who have to pay higher prices and don’t spend as much elsewhere. The net depressing effect will come from the kinds of adjustments enumerated above.
Finally, I wonder about the morality of the living wage. What business does government have preventing voluntary trade between two individuals when no one else is harmed? Surely the individual worker, not the nanny state, can decide what is best for him or her. Moreover, if there is a principle that unifies the last three hundred years of economic research it is this: When two adults voluntarily consent to trade, each gains. The process of trading itself is what leads to prosperity for the traders. Why would we want to further reduce economic freedom to trade when the overwhelming evidence is that economic freedom is the real key to prosperity?
“Living Wage” Hurts the Poor
Subsequent to my statement of May 20, 2005 I have seen several more empirical claims that the living wage will not hurt the poor. These claims constitute voodoo economics in the extreme.
Many factors (such as tax climate, regulatory climate, education, local entrepreneurial opportunities, what is happening in other states and localities, what is happening in other countries, business cycles and so forth) in addition to the “living wage” determine whether a local economy expands or contracts. In order to tease out an economically sound estimate of the effect of the “living wage,” the empirical economist must account for all the factors. Empirical studies that purport to show that the “living wage” does not hurt the poor and perhaps even expands employment and helps the poor do not account for all factors.
Studies that do account for all factors show overwhelmingly that wage floors hurt the poor. And those hurt are the least effective interest group in society (minorities, low skilled, relatively uneducated). They have no voice in the matter. All many of them know is that there is no job available when they go looking. For them the legal living wage becomes ZERO.
An excellent summary of the history and all the empirical evidence of wage floors may be found in: David Neumark in his research summary “Raising Incomes by Mandating Wages.” There are lots of things we can do to help the poor. The “living wage” idea is not only ineffective; it is counterproductive.

Government Should Not Set Wages

Hope must spring eternal! Despite the universal failures of socialist regimes, lefties continue to mouth the siren song of economic salvation by the government.
Albuquerque City Councilor Martin Heinrich has joined the choir. He wants Albuquerque to follow in the ruinous footsteps of Santa Fe with an elevated minimum wage law. Heinrich is pretty much a piker, though. His Fair Wage proposal would set the minimum at “only” $7.15 per hour, while Santa Fe’s so-called “living wage” is already $8.50 and slated to grow to $10.50.
This being such a terrific idea, why not $50?
You have to give the left an “A” for spin. “Living wage” is as warm and fuzzy as motherhood and apple pie.
Then follow with an “F” for economics.
With each passing day, communities in the United States find themselves in greater competition with each other, and with other countries’ economies. One doesn’t need Econ. 101 to understand that a rational employer will do whatever it must to avoid paying more than a particular job contributes to whatever the employer is selling in a competitive market. This cost avoidance can include automation, out-sourcing, moving to a less anti-competitive location and myriad other strategies.
When a community like Santa Fe – well known for elitism from the get-go – adopts a super minimum wage, it telegraphs to everyone its decision that lower-paying jobs are simply unwelcome. That leaves nearly unemployable the young, who are eager for career starts, and others who are simply unskilled.
Sure, a hotel, restaurant or retailer wanting to sell in the Santa Fe market has to bite the bullet and pay, but the result must be higher prices with the risk of driving customers away.
Or the result could be driving customers ever more into labor-efficient operations like Wal-Mart. More on that below.
Some considerations go beyond labor cost. One employer recently moved his business from Santa Fe to Pueblo, Colorado. When asked if the “living wage” law were the cause, he replied, “Not directly … but I don’t want someone coming in and telling me how to run my business.” I know from personal experience in Santa Fe that his wasn’t the first to leave for exactly the same reason, and no one will ever know how many businesses refused to consider Santa Fe on this account.
One morning last October, I debated “living wage” with former Albuquerque District Court Judge Anne Kass. Supporting her anti-capitalistic view of the world – in debate and a subsequent column – Kass went all the way back to slavery, then fast-forwarded to an unnamed family in Arkansas that “has amassed a shocking fortune … the old-fashioned, American way – by exploiting workers …”
That would be the family of Sam Walton, who invented Wal-Mart. Kass’ spin appeals to the typical knee-jerk liberal, but in fact she ineptly picked a stunningly inapt example to support her case.
For one thing, Wal-Mart employees already do exceptionally well when compared with others employed in retailing.
For another, Wal-Mart’s sales per employee are astronomical. It can pretty easily swallow any increase that might result from a “living wage” law, and happily collect customers driven to it by price hikes other retailers must enact to cover government-mandated labor costs.
Lastly, I can think of no business that should be less a target of the left than Wal-Mart. Name a single business anywhere that has made it possible for more people of limited means to live better than has this product of Sam Walton’s genius. Of course his family is wealthy: that’s a highly prized result of business success in free-market economies.
Heinrich’s upbeat statements to the press notwithstanding, a case simply cannot be made that Santa Fe’s “living wage” law has been good for its economy. Now he’s backing off, saying only that “the sky has not fallen.”
Well, a bit of patience on that is warranted. No one claimed the sky would fall in the ten months the law has been in effect. Further, anyone acquainted with Santa Fe’s economy for at least 50 years knows it is not a reasonable test bed for Albuquerque or any other New Mexico community.
An economy remaining at the U.S. bottom has no need of more bleeding-heart meddling.
Economy Energy and Environment Oil & Gas

Economic Aspects of Energy in New Mexico

a. The Issue of Electric-Power Deregulation

PNM successful campaign to pull the plug on the state Legislature’s plan to deregulate electric utilities in 2007 portends nothing but high prices in the long run. Our politicians should study the California’s electricity-crisis case. The California debacle is used by those who favor electricity regulation as a demonstration that free markets are inappropriate for electric-power markets.

At the turn of the 20th century in state after state throughout the country public utility commissions were established with the responsibility to regulate the utilities. The consensus was that public utilities are natural monopolies, and, unless regulated, would charge the public monopolistic prices. Today, at the turn of the 21st century, we challenge the need to regulate electric public utilities for two reasons: First, the technology of wheeling electricity over long distances has improved dramatically: High voltage transmission lines and improved alloys used in their production lowered the transmission costs significantly. Consequently, electric power can be wheeled from the Four Corners Power Plant to California at a relatively very low cost. Second, over the years, economists realized that state regulatory agencies became captives of utilities to the point that regulated prices, even if not set at monopolistic levels, are higher than what alternatively would be competitive prices. In 1995 the country was ready to embrace the open power markets. What happened in California changed everything.

In 1996, the California legislature voted to restructure its electric industry. All retail customers were allowed to buy power from electric service suppliers of their choice. The monopoly of the local California utilities was thus broken and utilities were transformed into middlemen. But, unfortunately, politics of different interest groups played a bigger role in the restructuring process than economic analysis. Consequently there were two fatal flaws in the deregulation plan: First, for stranded costs considerations, retail prices were capped at a level that had been then above the anticipated wholesale price. Second, the utilities were required to acquire power for their customers solely on the spot-wholesale markets. The new market structure became effective in April of 1998.

In the Spring of 2000 Four factors combined to push wholesale prices way above the expected $25/Mwh: (1) demand for electricity intensified due to unanticipated economic growth and unseasonable weather; (2) drought reduced the supply of hydroelectric power; (3) rising natural gas costs increased wholesale prices on the spot market instantly; (4) rising prices of emission credits increased the variable costs of generation. As a result, from the early spring of 2000 to the early summer of 2001, spot wholesale electricity prices soared to unprecedented levels. Since the retail price remained capped, the utilities absorbed the difference and eventually became bankrupt.

At the beginning of summer of 2000 the utilities could have saved Californians money and blackouts by entering into long-term contracts. At that time, the utilities had known that gas prices were expected to rise and the water level behind the dams were expected to recede because of the drought. But, the California regulatory agency, guided by the bogus deregulation of 1996, ignored the requests of the utilities to purchase future electricity at reasonable prices. The electric-power market collapsed, and the state took over purchasing wholesale and selling retail power.

Finally, in June of 2001, the factors that initially caused the crisis reversed course. In particular, the demand for electricity began to abate and natural gas prices were falling across the Unites States. The wholesale prices of electricity returned to a reasonably low level. The crisis passed, but California’s lost billions of dollars in the process and will continue to pay high prices far into the future. It is ironic that out of desperation, at the beginning of 2001, Governor Davis instructed the California Department of Water Resources to negotiate long-term contracts with wholesale suppliers of power. It is likely that, since wholesale prices were still relatively high, he saddled California residents with obligations to pay $40 billion for electric power with a market value of only $20 billion.

The lesson from California to New Mexico: There is no alternative to the discipline of competition in an open market. If, and when, New Mexico decides to deregulate its power market it should take the following steps: (1) break the monopolies of utilities in their respective service areas by allowing users to access electricity from out-of area and out-of-state suppliers of their choice; (2) allow electric-power prices, both wholesale and retail, to move freely, up and down, in the marketplace such that supply and demand are always in balance; (3) allow users to freely choose between buying electricity on the volatile spot market, or, alternatively, enter bilateral long-term stable contracts with power suppliers.

At the end of the day the choice is between the regulated local monopoly with relatively stable but very high prices or a completely deregulated electricity market with more volatile, but, on average, significantly lower prices. Rational users will always prefer the latter.

b. Natural Resources

New Mexico is rich in natural resources: It ranks 13th in the production of coal (third in reserves) and third in the production of natural gas (second in reserves). It exports almost half of its generated electricity, over 80 percent of its natural gas and 40 percent of its coal. Both natural gas and coal are sold on very competitive markets. Our policy recommendation is simply to leave the decisions of how much to produce, and of that what fraction to export, to the entrepreneurs on the open market. Some pro-development New Mexicans lament the fact that much of our natural gas and coal are exported as raw materials rather than electricity. Environmentalists oppose converting these natural resources into electricity because water is a factor of production in the generation of electricity. Orders of magnitude are relevant here: Annual depletion of water in New Mexico is in the order of magnitude of 2.5 million acre feet. Irrigation accounts for 75 percent of the total depletion. Currently, water consumed in the generation of electric power is about 70,000 acre feet, a mere 2.8 percent of the total annual depletion. In the future, electric generating firms could purchase additional water rights in the marketplace without raising water prices appreciably.

Last, but not least, our elected leaders should not be tempted to raise the tax rates on our exhaustible natural resources for the simple reason that, although up to a point higher tax rates will yield more revenue, higher taxes will also result in a reduction of employment and weakening of economic activity.

c. Wind and Other Green Power

Generating electricity by burning coal, natural gas or using nuclear reactors on average costs between 3 and 4 cents per kwh. Of the three, the additional external cost to society and the environment is highest from coal and lowest from nuclear power. Once the federal government resolves the issues of nuclear waste, catastrophic insurance and who bears the decommissioning costs, nuclear generation of electric power will be revived. New Mexico, which is rich in uranium will definitely benefit from this trend.

PNM and Florida based FPL Energy built a 204-megawat wind-generation facility, or what is otherwise known as a wind farm. This deal was undoubtedly stimulated by New Mexico’s legislature endorsement of a rule mandating that five percent of utilities’ energy must come from green sources by 2006, and ten percent by 2011. Any minimal environmental gain from this project will “spread” over the entire southwestern states-it will be gone with the wind. According to the Wall Street Journal (August 27, 2002), although wind energy is clean, its cost is still 5.84 cents per kwh in good wind sites, and 3.89 cents in optimal wind sites. We cannot be sure if PNM embarked on this project because of federal subsidies (1.8 cents/kwh), or because wind farms politically endear PNM to the environmentalists who, in return, might support its battles to retain monopoly. It is difficult to conjecture what motivated the Public Regulation Commission (PRC) to dream up such a grandiose plan. Could it be the increasing instability in the Middle East? War in the Middle East could cause another energy crunch that might affect the transportation sector that depends on foreign crude oil, but not the electric-power sector that depends on plentiful domestic natural resources, such as coal, uranium and natural gas.

Could it be concerns for clean air? Probably. But, first, applying renewable energy in the generation of electricity in New Mexico would reduce the use of coal by the San Juan Generation Station near Farmington. The blessed wind does not recognize state boundaries. Consequently, the air pollution-reduction at the San Juan Generation Station would be spread over Arizona, Utah and Colorado: It will be gone with the wind within days. Do we, New Mexicans, like to pay higher prices for electricity to give our neighbors a free ride on clean air? I believe the answer is a resounding “no”, and this is why clean-air policies should be initiated at the federal level.

Second, mandates, known otherwise as social engineering, are arbitrary and economically inefficient. The decision as to when renewable sources should be used in the generation of electricity is best left for the marketplace. Of course, external costs from air pollution are involved in the generation of electricity. The external costs of using coal, gas turbines, nuclear reactors or even wind cannot be dismissed. But, clean air and water policies should be left for the federal government.

The federal energy policy is far from perfect. The energy industry enjoys outrageous subsidies and market distortions. Advancing renewable energy through subsidies is a bad idea. Such subsidies, like the 1.8 cents tax credit per kwh generated by wind, lead to political-pressure groups that invest time and money in lobbying for higher subsidies. The subsidy to ethanol is an example that has not met the test of time. The subsidy to ethanol, which is derived from corn, is alive and well even after it has been shown that it generates less energy than it takes to produce, and other gasoline-cleaner-supplements are available in the marketplace. Since it takes more energy to produce ethanol than ethanol produces, it probably causes more pollution than we would have with no subsidy at all. But it seems that the farm bloc has the political power to perpetuate a bad subsidy forever. Instead of subsidizing green energy resources, the federal government should tax natural resources that, in the process of producing electricity, generate conventional pollutants (sulphur dioxide, nitrogen oxides and mercury) and carbon dioxide.

As an illustration, a unit federal tax should be imposed per kwh of electricity derived from coal, and the revenues from this tax should be used in the development of clean coal technologies. Nuclear energy does not release any greenhouse gases, but its price does not reflect its true marginal cost. A permanent nuclear-waste facility in the Yucca Mountain should begin serving all nuclear reactors in the United States as soon as possible. Nuclear waste and decommissioning costs should be borne by owners of nuclear reactors. Also, the Price-Anderson Act which provides unlimited government insurance for nuclear reactors in case of catastrophic accidents should be rescinded. Electric utilities should pay for nuclear catastrophic insurance, and they should generate nuclear energy and sell it in the marketplace at a price that covers its true costs.

Mandating renewable energy in the generation of electricity is a tax on New Mexico citizens as rate payers-we don’t need higher taxes. California is mandating these senseless green initiatives in spades. In the unlikely event California mandates really do lead to discoveries producing long-term benefits, New Mexico will benefit without having to tax our citizens. Last, but not least, The New Mexico legislature is urged to guide the PRC to focus on its only logical mission, namely to protect New Mexico consumers from natural monopolies.

Economy Tax and Budget

TOPS 1: New Mexico Taxpayers’ Opportunity-Prosperity Safeguard (TOPS) Amendment

Prosper (prŏs’per) v. to fare well
To be prosperous, to have our friends and neighbors be prosperous is our aspiration. Economic opportunity and the prosperity that evolves from it should be New Mexico’s future. It is not far fetched to foresee average annual incomes in New Mexico up by $6,500 per person. How do we achieve such an increase in prosperity?
The key to prosperity is to instill more discipline in and control over New Mexico’s state government. More discipline and control enable tax rates to be reduced. Reduced tax rates spur economic growth by allowing hard earned money to be spent or saved by those who earn it.
The Rio Grande Foundation is pleased to document state government’s spending and taxing problems in detail and offer solutions that generate prosperity. Your comments are welcome. Please send email to