Deregulation Déjà Vu

If the new political leadership in Sacramento and the energy industry have their way, Californians will soon see a revival of electricity deregulation. That's right: a return to a volatile market of unregulated electricity transactions that put the state.

The following commentary by Jamie Court & Doug Heller, was published in the San Francisco Chronicle on Wednesday, May 5th, 2004:
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Assembly Speaker Fabian Núñez, Gov. Arnold Schwarzenegger and Southern California Edison (a lobbying force behind the first deregulation debacle) want to allow energy producers to sell power directly to big-business customers without state controls over supply or price. They are not using the "D" word, but deregulation is precisely what the plan entails.

When the price and supply of electricity are not regulated by the state, it's called deregulation. That's a policy the state moved away from after the blackouts and price spikes of 2000 and 2001 because it was clear that the freer the market was, the more all ratepayers became hostage to profiteers. The speaker and governor say there's little danger in a return to the deregulated market only for the biggest buyers, called "direct access," as they have each proposed. After all, big business can handle itself. It's not the total deregulation, they both argue, under which all ratepayers were invited to bargain with the likes of Enron. Still, both want to put too much power in the hands of the deregulated companies.

Turning even a quarter of the state's electricity back into an unregulated commodity would put small ratepayers at great risk. The biggest corporate customers will buy the cheapest power, leaving the rest of us poor residential customers paying more. The reason is that the plants producing the cheapest electricity — fueled by natural gas — were sold to the unregulated energy producers as part of the first deregulation, and they are the ones marketing directly to big business. This concentrates the more expensive electricity into the bills of residential and small business ratepayers.

Proponents of deregulation say that if it's good for big business, it must be good for California. Tell that to beleaguered ratepayers who are still paying off electric producers' price-gouging under long-term contracts and now retiring a new $10 billion-plus bailout to PG&E and Edison after the utilities were turned upside down from the profiteering of 2000. Ratepayers have just finished paying off another $20 billion bailout bill delivered from the Legislature in 1996 as the cost of having a deregulated market.

Behind the naïve attraction of politicians to the free market for electricity is, of course, economic self-interest. Just like "Deregulation, Part I" — which passed the Legislature with a unanimous vote in both houses — "Deregulation, The Sequel" has momentum because it promises to deliver for large corporations that are the biggest clients of both energy producers and politicians.

The real economics being ignored in the Statehouse is that balkanizing the electricity supply by separating large users from small ones will again leave the grid exposed to more manipulation by energy producers and even blackout blackmail. The truth is that unregulated energy companies will never deliver reliable electricity because they are paid more when energy is scarce and the supply unreliable.

The recent federal indictment of Reliant Energy showed that the gouging games started as early as June 2000 — before the shortages or a hint of a crisis — when the company shut down power to kick up prices. Now, electricity grid managers are concerned that there might be actual shortages in coming years. The attorney general warned last month that federal law remains incapable of protecting against profiteering. How realistic is it then to think that predatory energy producers will not take an already scarce commodity and make more energy vanish so the price can soar?

Guess which customers will get the short end of the light switch if it comes to rolling blackouts again — North Beach Pizza or Intel? The irony is that for 20 years, state rules have forced residential and small-business consumers to subsidize cheaper power for the state's big manufacturers. Even prior to deregulation, small consumers paid 60 percent more per kilowatt-hour than the large business consumers of electricity. Now big business wants even greater subsidies.

Núñez and Schwarzenegger promise that there are safeguards this time, but these leave the only oversight in the hands of a California Public Utilities Commission controlled by Mike Peevey, the former Southern California Edison executive who formed New Energy Ventures, an unregulated energy firm that was sold for $90 million. Schwarzenegger recently appointed an electricity deregulation guru to be his chief energy adviser, and is reported to be eliminating key regulatory posts at the California Energy Commission, which watches over energy production and consumption.

Electricity deregulation is definitely making a comeback in Sacramento. If this déjà vu plan is allowed to become real, then we'll all be fools.
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Jamie Court is author of "Corporateering: How Corporate Power Steals Your Personal Freedom and What You Can Do About It" (Tarcher/Putnam, 2003). Douglas Heller is executive director of the Foundation for Taxpayer and Consumer Rights in Santa Monica.