California's Deregulation Disaster
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?"