L.A. Weekly February 2, 2001
Power to (and From) the People!
Why outright public ownership (and not just shares in Edison)
will solve the power crisis
by Harold Meyerson
As our new president and vice president see it, California's power
crisis is simply what happens when government meddles with the iron
laws of supply and demand. If the lamps are going out all over Eureka, if
Silicon Valley is flickering at twilight, it is simply because Californians
have been too damned finicky about their air quality to build the power
plants they need. Over the past few years, after all, demand has been
soaring as the state has recovered from the deep recession of the early
'90s. The solution, obviously, is more supply - and if that spoils some
wildlife reserve or raises the shmutz-quotient of our air, well, that's just
the price of economic growth.
If we are in a crisis of supply and demand, though, why are the lights
still on here in L.A.? After all, no part of the state saw its economy dip
so
low in the early- and mid-'90s as Los Angeles, where the end of the Cold
War fairly halved the size of our then-largest industry, aerospace. And
nowhere has demand grown more, as the local economy has turned from
bust to boom, than here in Los Angeles. We consume power like
nobody's business: L.A. today is home to the greatest concentration of
manufacturing in the nation, and, come to think of it, we stay up nights a
lot later than they do in Turlock. If California is truly experiencing a
wave
of underproduction and overconsumption, Angelenos should be just now
lighting their candles and cursing the darkness.
Instead, we're still shooting lights across the sky at the premieres of
third-rate movies. For what California is confronting is a crisis not of
supply and demand, but of deregulation, of free-market mania, of
ideology run amok. That the lights are still on in Los Angeles is pretty
good evidence that publicly owned power companies such as our own
DWP can keep the lines humming, even as deregulated private power
companies can plunge a city into darkness if their profit margins are too
low.
Consider, for instance, how our other local power company, the
investor-owned Southern California Edison, chose to allocate its
revenues over the past several years. The state has just completed
an audit of this model corporate citizen, and discovered that of the
$7 billion that SoCalEd took in over the past five years from the
good ratepayers of Orange County and the San Gabriel Valley and
the other parts of the L.A. area not serviced by the DWP, it
forwarded $4.8 billion to its parent company, Edison International,
which paid out $1.6 billion in shareholder dividends and used $2.7
billion to buy back its stock. While the DWP was keeping its rates
low and creating cleaner and more efficient generating and
transmission facilities, Edison simply "took the money and ran," as
state Senate President John Burton put it.
Worse yet, Edison was taking money out of the community that
had been guaranteed it by the terms of the state's deregulation
package, which fixed the rates that Edison here and PG&E in
Northern California could charge their customers. This was not a
ratepayer-protection provision, though it has been widely reported
as such by innumerable editorialists chastising the state for
coddling its consumers. To the contrary, it was designed to keep the
utilities' revenues higher than they otherwise would have been,
since wholesale prices were so low. The rate was fixed not to keep it
from rising above what consumers could afford, but from falling
beneath what the companies wanted. And - until wholesale prices
moved upward last year - that's precisely what it accomplished.
The editorialists thundering that California's consumers have been
unnaturally sheltered from the market, then, have it backward. For four
years, consumers paid more so that Edison shareholders could thrive.
And now that the crisis has hit, consumers are being asked - well, to pay
more so that Edison shareholders can thrive.
And thrive they will. On Monday, the Legislature began to craft a bill
that would have the state issue bonds that would fund its going into
business to purchase power from generators, that would fund the utilities'
repayment of debt, and that would authorize them to raise their rates. And
on Monday, not coincidentally, brokerage houses told their clients
that it was safe again to buy PG&E and Edison stock.
Indeed, word of the pending bond issues was good news for Wall
Street not simply because it meant the investor-owned utilities were
viable again. For one thing, Wall Street makes money on bond issues: In
1996, the last bond issue for California's utilities brought in a cool $46
million in broker fees for investment bankers.
For another, the bill that is currently taking shape does not
present the kind of ideological challenge to Wall Street that, for a
time, it looked like Sacramento was prepared to mount. For the past
month, Gray Davis and the topmost legislative leaders, Assembly
Speaker Bob Hertzberg and Senate capo Burton, have all endorsed
(Burton avidly, Davis tepidly) the establishment of a state public
power authority, with generating and transmission facilities of its
own. After all, California is home to 30 such authorities at the
municipal level, of which the DWP is just the most conspicuous, all
of which had been able to provide uninterrupted power to their
consumers, at lower rates than their investor-owned counterparts,
during this time of alleged scarcity. Precisely because such
companies don't have to meet the profit projections of their
institutional investors, they've been able to keep the lights burning.
In recent weeks, an idea much in favor in Sacramento, then, was not
simply to establish such a public authority, but to have it take over the
hydroelectric facilities or, more promising yet, the power grid of SoCalEd
and PG&E, in return for the state's paying off the companies' debt. If
taxpayers and ratepayers were once again going to shell out to keep the
utilities in business, they should get something tangible in return.
In the past week, however, the governor and Legislature changed that
to something in-tangible. They still supported a public power authority, but
this new agency would not acquire power lines and power plants as a
condition of picking up the utilities' debt. Suddenly, the word around
Sacramento was "warrants" - that is, stock options in the utilities
that the state would acquire in return for picking up their debt, and
that the state could exercise if the utilities' stock appreciated.
Why warrants? For one thing, Republican legislators were
uncomfortable with the state's taking real property in return for helping
the
utilities; that smacked too much of socialism. "Some kind of warrant or
option is the more appropriate way to go," said Jim Brulte, leader of the
GOP's state Senate delegation. Davis - a leader with all the resolve of J.
Alfred ("Do I dare to eat a peach?") Prufrock - wanted bipartisan cover
for his bailout. He also wanted to please Wall Street, whose disapproval
would be a formidable stumbling block to any future Davis presidential
bid. By that standard, linking the fortunes of the state to the rising stock
price of the utilities was a slam-dunk.
By any other standard, however, it's a grotesque idea. The one
precedent for the government's taking stock options in return for
bailing out a company is the case of Chrysler back in the '70s. But
this is an entirely different matter. Chrysler was saved chiefly
because it provided too many decent-paying jobs. And when
Chrysler stock appreciated, it wasn't because Lee Iacocca had
raised the prices on cars that everybody had to buy.
Under the warrants plan for the utilities, however, the public's
interest as a ratepayer is diametrically opposed to its interest as a
shareholder. If the utilities ask the Public Utilities Commission for a
rate hike, or for permission to run their plants more profitably by
fouling the air a little more, how does the PUC calculate the public's
interest? If the new public power authority threatens to take
business away from Edison and PG&E half a decade from now, how
should the PUC respond? Is it in the public's interest to promote the
Big Two's profits, or to keep its own rates affordable?
A swap of real assets in return for debt, by contrast, entails no such
conflicts. It simply hands those assets to a public sector that in city
after
city across the state, in regional authorities such as the TVA, and in other
states with such authorities (such as New York), has been able to provide
reliable, affordable power. Indeed, what's striking about the debate we're
now having on how to get out of this fix is that not one opponent of
public power has answered why it is that cities and regions and
other states can run eminently successful power authorities, but,
uniquely, the state of California cannot.
Nor, for their part, have champions of public power sufficiently
contested the basic premise of the deregulators: that the distribution of
power is best accomplished in the most freewheeling marketplace. The
problem with this model is that the buyer is nowhere so free as the seller.
A person, an office, a city cannot simply do without electricity for a week
if
the price is too high, any more than they can do without oxygen. It is the
absolute dependence of the buyer that makes this a very unequal
exchange - unless the distribution is regulated, or publicly controlled, or
both. Instead, what California established when it deregulated the
industry in 1996 was a system that maximized the buyer's vulnerability,
forcing utilities to buy their power on a daily basis on the spot market.
That's not a crisis of the supply and demand for natural resources.
That's a crisis of a marketplace that gives all power to the seller.
For the new administration in Washington, however, California's
deregulation debacle provides a marvelous opportunity to remedy
an entirely different crisis - the heart-rending inability of the
American oil and gas industry to realize profits that transcend the
obscene. To be sure, Enron, Reliance Energy and Duke Energy -
the companies that are peddling power to California now - are
unveiling their best quarterly reports ever. But for the Bush
administration - which, to judge by its mindset and r,sum,s, is
really the oil industry vested with state power - the California
crunch creates the opportunity to remake the world in the image of
East Texas.
In just the past few days, both Dick Cheney and W. himself have
called for drilling in the Arctic National Wildlife Refuge. Cheney has
called
for establishing power plants just across the border in Baja - oil
maquiladoras, free to churn out power without having to observe those
costly environmental safeguards. (Bush has called for reducing our
dependence on foreign oil, but, hell, Baja's just California without the
regs.) Both have said that California needs to have its plants run at full
capacity, even if that means weakening the standards set by
amendments to the Clean Air Act that Papa Bush signed in 1990. And,
lest anyone conclude that the new administration is eco-insensitive,
Lawrence Lindsey, Bush's economic adviser, has opined that higher
prices for California ratepayers "would certainly encourage conservation."
In his very first week on the job, W. has shown himself to be the president
of, by and for the Houston boardrooms. All the more reason why
Californians need a public power authority of their own.
