The history of the deregulation debacle

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Background: For nearly a century, California’s electricity has been provided by electric utility companies, each with their own local monopoly. For many technical and economic reasons, it has been cheaper for one electric utility to provide electricity than for several.

During the 1970’s and 80’s, the state’s three largest electric utilities foolishly built expensive, dangerous nuclear power plants costing billions of dollars. The nuclear power plants caused their electric rates to skyrocket. (Other utilities that wisely avoided nuclear power were able to keep their electric rates lower).

Since they use tremendous amounts of electricity, large industrial corporations began complaining about the high cost of electricity from their local monopoly utility. They began to push for the right to avoid the local utility and shop for the cheapest power available. The utility companies were worried that if large industrial customers are allowed to shop for the cheapest power, they might be unable to pay off the debt owed on its power plants and other assets.

“Deregulation” Proposals: To solve their problem, the utility companies joined with big corporations in a legislative proposal to force residential ratepayers to pay off their power plants and assets, so that those utility companies could then “compete” against other companies which did not invest in non-economic power plants.

The deregulation bills enacted in California, Illinois, Texas, New Jersey, and other states include multi-billion dollar bailouts of the utilities for their bad investments in nuclear power. California utilities have already received about $17 billion, much of this sum coming from the backs of hardworking families to pay for their poor management. In Illinois, the utilities are receiving about $14 billion; in Texas, nearly $5 billion; in New Jersey, nearly $9 billion. Nationwide, the utility bailout could total over $200 billion, making it one of the largest bailouts in history. And this bailout money is coming straight out of ratepayers’ pockets.

The energy industry promised that deregulation would bring competition and lower prices. But those promises have proved empty. Just the opposite has occurred in the first region in the nation to experience deregulation.

The California Law: In 1996, the California Legislature unanimously approved legislation backed by the utility industry to “deregulate” electricity. The Legislation promised competition and at least 20% lower electricity rates by 2002.

Under the 1996 plan, rates would be frozen at rates roughly 50% higher than the national average for up to four years (1998-2002), during which time residential and small business ratepayers were required to pay off the utilities’ “stranded assets” — debts from dirty, non-economic power plants, including nuclear. (So far, California ratepayers have paid an extra $17 billion under this tax). Money was borrowed to lock in these payments — and to finance a “rate reduction” for ratepayers. This money will be repaid for a total of ten years (1998-2008). Because it must be repaid, the 10 percent rate cut will amount to less than a 3% reduction in electricity costs for residential and small business consumers over the course of the next several years.

Additionally, under the legislation, the Public Utilities Commission encouraged the utility companies to sell off their power generation facilities. However, some nuclear and hydropower facilities were retained by the utilities.

The California law became the model for similar efforts nationwide (more than twenty states have deregulated electricity) as well as preemptive federal legislation, a portion of which will be the subject of congressional hearings shortly.

Under the 1996 law, California was supposed to open its electricity markets to competition in April 1998. Because the California deregulation scheme provided billions of dollars to the in-state utility companies, competition never materialized. Less than 2 percent of all California customers, including large industrial customers, have switched suppliers. Almost no residential customers have switched. Thus, nearly everyone in California is now being served by a largely unregulated monopoly. (New Jersey opens its markets for all customers in November 1999; Illinois opens for all non-residential customers by January 2001 and all residential customers by May 2002; Texas opens for all customers in January 2002).

Flush with billions of dollars in ratepayer subsidies, the parent companies which control the three utility companies went on a spending spree, repurchasing their own stock and spending billions of dollars buying power plants throughout the United States and in other countries.

1998 — Ratepayer Revolt Part I — Proposition 9: The only challenge to the 1996 deregulation plan was the decision of the Foundation for Taxpayer and Consumer Rights, TURN and the Public Media Center, with the support of Consumers Union, to amend the law through a 1998 ballot measure that would have reduced the amount of the bailout of the utility companies, lowering rates by 26%, according to a California Energy Commission study. However, the utility companies spent $50 million on their campaign against Proposition 9, as well as millions more in donations to non-profit, community, environmental and low-income organizations which then opposed the measure. It was defeated in November 1998.

Summer, 2000 — Revolt, Part II: The San Diego Crisis: San Diego Gas & Electric (SDG&E) ratepayers paid off that utility’s debt early. Effective July, 1999, that companies’ rates were unfrozen and subject to the free market. Between May and June, 2000, the price of energy rose 240%, and utility bills doubled. The cost to San Diego’s economy has been estimated at $100 million per month. The region is in chaos, and San Diego’s state Senator — the architect of the deregulation law — has been subject to so much public criticism that he has urged ratepayers not to pay their bills. In effect, San Diego has become the guinea pig for the deregulation experiment that has gone awry.

On July 20, former San Diego Mayor Maureen O’Connor and FTCR proposed the following actions:

1. Declaration of a local state of emergency.

2. An immediate rate rollback to electricity rates in effect prior to deregulation (July, 1999), and a freeze on those rates.

3. Repeal of the 1996 deregulation law and re-imposition of regulation at the state and federal levels.

On July 25, the San Diego City Council and County Board of Supervisors declared a State of Emergency and adopted resolutions addressing the crisis, including: (1) demanding that the Public Utilities Commission impose a rate rollback to July, 1999 rates; (2) calling for legislative hearings on whether to repeal deregulation; and (3) exploring the use of local utility franchise fees to provide ratepayer relief. When the state Public Utilities Commission refused to act, advocates turned their attention to the Legislature. In August, the Legislature approved a rate rollback and freeze until 2003 for San Diego ratepayers. However, at the behest of SDG&E, the legislation suggested that ratepayers would ultimately have to pay the utilities back for the higher cost of electricity they pay during the rate freeze. The Public Utilities Commission is required to decide how much ratepayers must pay.

December, 2000: The Statewide Christmas Power “Shortage”

A few weeks ago, the private utility corporations told the people of California not to turn on their holiday lights next month. Meanwhile, with winter only weeks away, the state-created but industry-controlled agencies that govern our power system have repeatedly issued power shortage warnings that we used to expect only in mid-summer, when air-conditioning use is high. On Thursday evening, December 8, a Stage 3 alert was declared. Under a Stage 3 alert, communities throughout the state can be subjected to systematic “rolling” blackouts, for period of an hour or more, with no notice.

What the Utility Companies Are Saying: The utility companies are attempting to portray themselves as victims, like ratepayers. They say the fault lies with the power generators. Edison and PG&E claim they are simply pass-thru mechanisms and that they have paid $6 billion more for electricity than they can collect under the rate freeze. They want to change the 1996 law to be able to force ratepayers to pay for the higher energy costs, even though the 1996 law clearly states that the utilities cannot do so. The state Public Utilities Commission — which is appointed by the Governor — has rejected their pleas — so far. The utilities have gone to federal court for relief, and are also asking the Legislature to change the law.

But the utility companies are themselves are still power generators. According to a report by TURN, Edison produced $1.45 billion in net revenues from January through August of this year from power sales; the company reaped $1.8 billion in profits between 1997 and Q2 of this year. PG&E‘s generation brought it $1.47 billion this year; its cumulative profits were $2.6 billion.

The utilities have collected $17 billion from ratepayers for “stranded assets,” far more than they have paid out in higher energy bills. Additionally, the parent companies of PG&E, Edison and SDG&E own unregulated energy generation companies that provide substantial power supplies to the state and throughout the nation.

What the Energy Companies Are Saying: The energy generation companies claim that there is a shortage of power plants in the state. They admit that many of their plants — roughly 25% of total capacity in California — are not producing energy at this time. But they claim the plants are out of service for “maintenance and repairs.”

Independent investigations have stated that, using the 1996 deregulation law, the energy companies are able to manipulate supplies and prices. In a report issued July 17, the California PUC found:

“[S]ellers may have been withholding power from this market in order to drive up prices in other parallel markets.” (California’s Electricity Options and Challenges, p. 14).

It continued: “When supply becomes tight in relation to anticipated demand, prices in all markets increase, in part because of the knowledge that unfilled demand in the final real-time market must be met – even if it is met at a very high price. This knowledge may induce sellers to withhold supply in order to raise prices in all markets. Withholding can be accomplished in very sophisticated ways.” (Id.)

Further: “During some periods, it is in the generator’s interest to withhold some power because in so doing it can drive prices up, according to Severin Borenstein, a professor of business at UC Berkeley and PX Boardmember. According to Borenstein, restructured electricity markets may have attributes where ‘if firms of noticeable size are not exercising market power, they are doing so out of the goodness of their heart, and against the interest of their shareholders.'” (p.28).

Under deregulation, there is no incentive for companies to invest in construction of new generation facilities; indeed, doing so would undercut their ability to limit supplies and reap windfall profits. In a cartel-controlled market, the energy companies maximize profits by keeping supplies tight, a phenomenon known as “scarcity rents.” The extremely high cost of power plants discourages others from entering the market.


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