Doctoral Dissertations

Paula Dowell

Date of Award

12-2000

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Major

Economics

Major Professor

Matthew N. Murray

Committee Members

William F. Fox, Donald J Bruce, Paul M. Jakus

Abstract

Restructuring activity in the electric utility industry is threatening a once stable and significant source of revenue for local governments. Potentially declining revenues from electric utilities leaves local policymakers with the unpopular decision of raising taxes or reducing the level of public services provided. This has led to pressure on state governments to introduce legislation aimed at mitigating potential revenue loss for local government due to restructuring activity. However, before imposing such legislation, a better understanding of the potential distortionary effects of internal subsidization by electric utilities is needed.

Two models of the demand for local public services- a structural model using the Stone-Geary utility framework and a reduced form model -are developed in an attempt to model the behavioral responses of local public expenditures to revenue contributions from electric utilities. Empirical analysis of both models is conducted using a panel data set for 242 municipalities in Tennessee from 1988 to 1998. Aggregate spending and expenditures on four specific service functions are examined.

The results provide evidence of a positive flypaper effect. Furthermore, the source of the flypaper effect is attributed to fiscal illusion caused by price distortions. The stimulative effect of electric utility revenue contributions on the level of local public services indicate that a $1.00 change in electric utility subsidies results in a change in local expenditures ranging from $0.22 to $1.32 for the structural model and $1.97 to $2.51 for the reduced form model. The amount of the marginal effect directly attributed to price illusion is estimated to range from $0.04 to $0.85. In addition, the elasticities of electric utility revenue contributions are estimated to range from 0.05 to 0.90.

The results raise a number of interesting issues regarding municipal ownership of utilities and legislation regarding tax treatment of utilities after restructuring. The fact that the current study suggests that electric utility subsidies give rise to fiscal illusion raises new questions regarding the justification of safeguarding the exclusive franchise of municipally-owned utilities and revenues from electric utilities in the era of restructuring.

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