WASHINGTON -- Is the ability that public power utilities have to issue tax-exempt bonds the main reason their rates tend to be lower than those charged by privately owned utilities?

That's the question and Office of Management and Budget official recently asked the American Public Power Association, and the group's answer was a firm "no."

An OMB spokesman downplayed the question, saying it was a digression within a conversation on another subject and does not indicate that any administration policy is being developed in that area. But the public power industry did not take the question lightly, and wrote a letter to OMB to detail its position.

"Tax-exempt financing explains only a small part of public power's sizable rate advantage," the association said in a Sept. 23 letter to Kathleen Peroff, the deputy associate director of OMB's energy and science division.

The subject of tax-exempt financing arose in a meeting between Peroff and Charles A. Acquard, a lobbyist for the public power group.

Acquard requested the meeting to talk about legislation passed last year that created a program under which public utilities can qualify for payments from the Department of Energy for electricity generated through renewable sources, according to Madalyn Cafruny, a spokeswoman for the public power group.

During that discussion, Peroff apparently digressed at one point to ask whether it was true that tax-exempt financing is the reason public utilities are able to change consumers lower rates than private utilities, which do not have access to the tax-exempt market.

In its newsletter, Public Power Weekly, the association on Sept. 27 described Peroff's question as stemming from "allegations from OMB staff that tax-exempt financing is the reason public power has lower rates" than privately owned utilities.

OMB spokesman Barry Toiv said it was important not to make too much of Peroff's question.

"The context of this was a broad discussion where there was a five-minute digression from another conversation about another issue," Toiv said. "There's no policy discussion related to this, at least in terms of the use of tax-exempt financing."

In Acquard's Sept. 23 letter, he said a 1989 study commissioned by the public power organization found that "even using unfavorable alternative financing assumptions for public power, its ability to issue tax-exempt debt accounted for less than a quarter of the difference in public and private rates."

Acquard said there are several other factors to consider. For example, public utilities are under the control of local governments, which carefully scrutinize their operations to keep costs down. For another, public utility employees receive "significantly lower wages, salaries, and perquisites" than their counterparts in private industry, he said in the letter.

In comparing public and private power, Acquard said it was also important to consider factors that often lower costs for privately owned utilities and inflate rates for the public sector. For example, the tax law allows privately owned utilities to defer taxes and receive investment tax credits that are not available to public utilities.

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