California's Deregulation Disaster
by HARVEY WASSERMAN
Blackouts, brownouts and soaring electricity rates have defined the political
landscape of California since last spring. They've transformed the phrase
"utility deregulation" into a household epithet. They've stopped in its
tracks a nationwide wave of electricity restructuring that has already
claimed two dozen states and was about to sweep the rest. And they've helped
create a crisis whose economic and ecological shock waves will carry deep
into the new century.
The roots of this unnatural disaster lie in the corporate boardrooms of the
utility companies now on the brink of bankruptcy. It was their mismanagement
and greed that led directly to some of the greatest miscalculations in US
business history. Those missteps, and their impact, were clearly predicted by
consumer and environmental activists, who fought to prevent them. "This was a
catastrophe we all saw coming," says Dan Berman, co-author of Who Owns the
Sun? "But the power companies had an agenda to push and the money to foist it
on the public. Now we all reap the whirlwind."
California's dereg disaster began in 1996, when the state's three dominant
utilities banded together to force on their ratepayers "the largest corporate
ripoff in American business history," as Ralph Nader has put it [see
Wasserman, "The Last Energy War," March 16, 1998]. At the time, Pacific Gas &
Electric (then the nation's largest privately owned utility), San Diego Gas &
Electric and Southern California Edison were caught in a squeeze between
their big industrial customers, who were threatening to generate power on
their own, and the burden of their own bad investments in obsolete
generators, mainly nuclear power plants. They were also tired of having their
rates regulated by the state's ninety-year-old Public Utility Commission.
What they wanted was to cash out of those bad investments, keep their big
customers and make profits at will, without regulation.
So they proposed the following: Regulation of distribution lines will stay
intact. We will separate the business of generating power from the business
of distributing it to the public. We will spin off much if not all of our
generating capacity (though in fact much of this was done only on paper, with
power plants merely being transferred to the distribution companies' parent
corporations). Then, as pure distribution companies, we will compete with
other resellers for customers, who can choose their suppliers and even
purchase "green" energy from companies selling wind and solar. Competition
will rule. Prices will go down.
The price tag for Californians? Somewhere between $20 billion and $28.5
billion in upfront "stranded costs," i.e., direct paybacks to the utilities
for their bad generating plants. These charges would be levied through
"transition fees" and other surcharges, buried in customers' bills but adding
up to as much as 30 percent of monthly payments. During the time it would
take to pay back those bad investments, retail prices would be frozen. The
California Public Utility Commission would also get $89 million in ratepayer
money to promote the new scheme, giving utilities a leg up on whatever
competition might materialize.
A bill, AB 1890, was drafted in SoCalEd's offices. After a few perfunctory
hearings, the legislature passed it unanimously and Governor Pete Wilson,
then a presidential candidate, eagerly signed it. Some consumer and
environmental groups were furious about a wide range of issues, most notably
the reactor bailouts, which they worried (correctly) would prolong the
operating life of deteriorating nukes and other polluters. So in 1998, as the
bill was taking effect, a broad coalition put a repeal on the ballot.
Surmounting virtually impossible odds, the coalition gathered more than
700,000 signatures in less than five months. Initial polls indicated the
measure would be a close call, but the utilities spent $40 million, calling
in their chits with labor, ethnic and other organizations around the state.
The repeal went down, getting 27 percent of the vote.
But in their haste to cash out, SoCalEd and PG&E made some critical
miscalculations. Most important was their assumption that there would always
be a surplus of cheap wholesale electricity. So they sold off too much of
their generating capacity and had too little of their own supply at a time
when rates were still frozen. Then came a hot summer and a cold winter.
Natural-gas prices shot up. Some key generators went down. Storms knocked out
transmission lines. The nukes had problems. The utilities found themselves at
the mercy of independent producers who'd snapped up generating capacity and
could manipulate the wholesale market. Having dismantled key efficiency
programs, the utilities now realized that their customers, buying power at
fixed costs, had little incentive to conserve. So demand quickly outstripped
cheap wholesale supply, which now spiked up at the whim of those with power
to sell. PG&E and SoCalEd became wounded, bleeding whales at the mercy of
sharks they could not control.
Companies like the North Carolina-based Duke Energy, Reliant of Texas and the
Houston-based Enron, the nation's biggest natural-gas distributor (and a key
supporter of George W. Bush), made billions selling power at high rates to
the companies that had just sold them their generators. By one estimate,
since last spring PG &E and SoCalEd have spent $12 billion more on power than
they were able to collect from their customers. In some cases, the two
companies were forced to sell juice to consumers at a rate of $64 per
megawatt-hour while paying $1,400 for it.
Even rival utilities got into the act. Oregon's Portland General Electric
withdrew a proposed rate hike for its own customers when it realized it could
sell power in California at a higher profit. At least two large bauxite
smelters in the Northwest shut down and realized some $500 million in profits
by selling into the southbound grid cheap electricity they were buying on
long-term contracts with hydro generators. Selling power was, simply, more
profitable than making aluminum. Perhaps most telling of all, the parent
companies of PG&E and SoCalEd made as much as $3 billion selling power to
electricity distributors, which were now pleading for state help to avoid
bankruptcy.
California Governor Gray Davis made repeated calls to the Federal Energy
Regulatory Commission and other national bodies to help fix prices, guarantee
supply and punish those companies gouging California consumers. But if the
crisis has illustrated anything, it's the inability of federal agencies to
control powerful suppliers whose political clout is exceeded only by their
ability to have their way with one of the world's most complex entities, the
electric-power grid. "Never again can we allow out-of-state profiteers to
hold Californians hostage," vowed a frustrated Davis. But at this point it's
not clear who could prevent it. Congress has debated national deregulation
bills, but they've gone nowhere. And most were headed in the wrong direction,
giving the private companies more license to mess with the system, not less.
None of the two dozen other states that have deregulated have yet suffered a
disaster on California's scale, but the results have been decidedly mixed. By
promising low rates and real competition, Massachusetts utilities beat back a
1998 repeal on the same day as the California repeal vote. Says Deb Katz of
the grassroots Citizens Awareness Network, "Massachusetts rates are now some
of the highest outside California. The only ones benefiting are the nuclear
corporations that have had their bad debts paid on our back." Similar stories
are repeated in nuke-laden Illinois and Michigan. In Ohio ratepayers have
been saddled with more than $5 billion in bad reactor debts, and no real
competition is on the horizon. In Pennsylvania, citizen groups beat back some
of the utilities' stranded-cost demands. As a result, some margin has opened
up for actual competition, and green energy suppliers have made some headway.
But in Texas, which deregulated right in the midst of the California crisis,
and in New York, which is doing it piecemeal, the results are not yet in. In
two dozen other states that remain regulated, and in Congress, the term
"gun-shy" might apply.
In California itself, consumer advocates want to put a sweeping rollback on
the 2002 ballot. Harvey Rosenfield of the Foundation for Taxpayer and
Consumer Rights, an early AB 1890 opponent, and others believe the utilities'
ability to hoodwink the public will be severely constrained by recent
memories of tripled electric bills and borderline survival. Gene Coyle, an
energy analyst, says that if prices "shoot skyward again, a campaign should
be winnable."
The state and private utilities are now caught in a vise. San Diego Gas &
Electric, which had fewer stranded costs to pay off and thus quickly escaped
the rate freeze, was able to double and triple its rates last summer,
infuriating Southern California consumers. Meanwhile, Governor Davis is
soaking taxpayers to buy power to resell to SoCalEd and PG&E to save them
from bankruptcy because their rates are frozen. But if they weren't frozen,
their rates would double and triple, infuriating the rest of the state.
"It's all been a big shell game," says Oakland-based activist Paul Fenn (see
www.local.org). "The distribution companies are causing panic by threatening
bankruptcy with huge paper losses. But the parent companies are quietly
taking huge profits while not accounting for all that stranded-cost money,
which is tucked away in foreign and out-of-state investments. Meanwhile, the
public gets no tangible assets in exchange for the subsidies. It's an
astounding ripoff."
Through it all, dereg apologists are having a hard time explaining why two
California power companies were immune to the crisis: the Los Angeles
Department of Water and Power and the Sacramento Municipal Utility District.
Both are owned by the public, and both maintain heavy commitments to
renewables and efficiency. In 1989 Sacramento voted to shut its one nuclear
reactor, and has since pioneered a major shift to solar, wind and biomass
energy, with heavy commitments to conservation.
During the crisis, rates charged by both companies have been stable. The two
"munis" actually made money selling power to their embattled private
neighbors, underscoring the fact that throughout the United States,
public-owned power districts supply electricity cheaper and more reliably
than the private utilities. The California crisis has already spurred
grassroots movements in San Francisco, Davis and elsewhere to demand
municipals of their own. "In the long run," says author Dan Berman, "public
ownership is central to any real solution to the problems of the
electric-utility grid."
So is conservation. At the peak of the crisis, Governor Davis ordered
widespread efficiency measures that kept demand down without significant
impact on the health and safety of the public. "Had the state been more
aggressively pursuing efficiency all along," says Coyle, "much of the crisis
could have been avoided."
Nonetheless, the constant drumbeat for more generating capacity will be hard
to counter. And the widespread assumption is that any new power plants will
be fossil- or nuclear-fueled. But every US reactor ordered since 1973 has
been canceled. There are none now under construction here, and resistance
would be ferocious, especially in light of nuclear power's role in prompting
the crisis in the first place. A year ago, natural gas would have seemed the
logical choice for new generating capacity. But prices have soared and aren't
likely to come back down soon.
Which leaves what the consumer/environmental community that opposed AB 1890
has been arguing for all along--renewables. The most notable new Western
power plant is now stringing its way along the Oregon-Washington border. It
consists of 450 windmills with sufficient capacity to power 70,000 homes.
With construction under way in February, electricity could be surging out by
December 31, a far faster construction timetable than for any other source.
The fuel supply will be cheap, stable and clean. Environmental opposition
will be nil.
Thanks to 15,000 windmills built in the 1980s under Governor Jerry Brown (now
mayor of Oakland), California once produced 90 percent of the world's wind
power. But the big utilities wanted little to do with them. Last year the
world-leader's mantle slipped to Germany, which built the equivalent of a
large reactor's capacity in wind power. Had California done the same, things
might have been different. "The message is clear, " says Coyle. "The power
supply needs to be controlled by the public. And efficiency and renewables
work. Do we have to go through this again to relearn those lessons?"
