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.