Bankruptcy v. Bailout

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California’s largest utility company, Southern California Edison, has thrown down the gauntlet to Governor Gray Davis: force the ratepayers to bail us out or we’ll declare bankruptcy.

In an energy system that is more like organized crime than a free market, this is blackmail. What Edison really wants is a ratepayer bailout from the failures of the deregulation law, which Edison lobbied through the California Legislature in 1996. But there are disturbing indications that Gov. Davis will seize on the fear of bankruptcy as justification for rescuing the utilities, among his biggest contributors. If he does so, the Governor will pay a capital price for his disloyalty to the public. So it’s worth examining which would be worse for California’s ratepayers: a bailout or bankruptcy?

BAILOUT. If Governor Davis orders a bailout, it will be the second one in four years. In 1996, the state’s three utilities — Edison, Pacific Gas & Electric and PG&E — wanted deregulation. But were worried that their bloated bureaucracies would not be able to compete. So they demanded that ratepayers be forced to subsidize billions of dollars in uneconomic deals on the utilities’ books. The Legislature agreed, freezing residential and small business electricity rates for four years at 50% above the national average. In exchange, the law stated that once the debts were paid off, the rate freeze would end and consumers would receive a “guaranteed” 20% rate reduction. Ratepayers have paid Edison and PG&E $17 billion so far under the “competition tax.” That was Bailout I.

Now, however, the utilities’ sweet deal has gone sour. Freed by deregulation from government oversight, the dozen wholesale energy companies that generate nearly half of California’s electricity supply are now manipulating the supply of electricity to create shortages. The market price of electricity has soared 3900%, far exceeding the frozen price. The power suppliers’ profits have risen by as much as 500%.

Edison, too, is profiting from the crisis as much as hurting from it: 70% of its power comes from the company’s own plants, for which it receives the market price. But Edison isn’t counting its profits when pleading its financial woes, and wants the Governor to order ratepayers, the innocent victims of this public policy fiasco, to pick up the entire tab — presently $6 billion and growing. Bailout II would be illegal under the deregulation law. Worse, it guarantees that rates will continue to skyrocket, because it tells the energy producers: charge whatever you want; we’ll just pass it through to the ratepayers.

BANKRUPTCY. Compared to another bailout, bankruptcy might well be less costly for ratepayers in the long run. Contrary to the utilities’ fear-mongering, a bankrupt utility would not shut down or be sold off for scrap. Instead, the company would be placed under court supervision and ordered to restructure its debts, operations and executive staff; borrowing money will be easier for the company than it is today. With legislative action restoring regulation, the Public Utilities Commission would control rates.

Bankruptcy also allocates responsibility where it belongs. Edison pushed for deregulation, and for awhile profited handsomely from it. The first bailout enriched the company, which went on an international spending spree. Its shareholders prospered, while its CEO, John Bryson, got a 46% pay raise. But in demanding to be in the “free market,” Edison took the risk that the market wouldn’t always operate to the company’s advantage. Now that their judgment has proven wrong, Edison‘s executives want to crawl back into the womb of government protection. The hypocrisy of their stance is rivaled only by their audacity. The shareholders should foot the bill, not the ratepayers. Bankruptcy would send the correct message to Wall Street — and to other states that are considering deregulation. If you insist on deregulation, you must be prepared for the consequences.

Bankruptcy is highly unlikely; but it might actually be helpful to the crucial task before us: to restore reliability and affordability to California’s energy system. The legislature must reinstate the authority of state agencies to oversee rates and plan for our future energy needs, encouraging conservation and other cost-effective technologies. Moreover, California should move to a non-profit, publicly-owned system. Private energy companies operating as a cartel have no incentive to alleviate the shortages they are prospering from. Today, publicly-owned utilities like LA’s often-maligned DWP are meeting their customers’ needs at lower prices, without having to ask them to shut off their holiday lights. A bankrupt Edison would be a cheap purchase. Rather than force ratepayers to spend billions to bailout Edison‘s shareholders, California’s leaders should consider purchasing the company and dedicating it to public use. A buy-out is better for ratepayers than a bail out.

Consumer Watchdog
Consumer Watchdog
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