January 19, 2001
By David Bacon
BERKELEY - California's experiment with deregulating electricity is on its last legs. "Deregulation is dead," declares Public Utilities Commissioner Carl Wood. And from the governor to the PUC to the legislature, almost everyone expects the state's electrical system to be regulated once again.
Meanwhile, the utilities stand with their hands out, threatening bankruptcy and demanding bailouts. Heightening the atmosphere of crisis, they lay off thousands of workers, just when ratepayers most need a skilled workforce to keep power plants running, and maintain a transmission and distribution system capable of surviving storms and blackouts.
In a crisis atmosphere, it's tempting to think the state can simply return to the past. But it can't. And the reason is the change in the utilities themselves. Despite their public protestations, PG&E and Southern California Edison are no longer primarily interested in providing dependable service to ratepayers at a reasonable price.
The mythology of deregulation tells us that the inefficient, regulated, monopoly utilities were dragged into this new era, kicking and screaming. They would be faced, goes the story, with unwelcome competition from the lean and mean companies of the future. These new competitors would out-perform the behemoths cutting costs to the bone and delivering products at cheaper prices. Consumers would rejoice.
But the mythology was just that. In fact, the utilities were the authors of deregulation. Their unregulated subsidiaries have become their own competition. PG&E (the world's largest utility) and SoCal Edison co-wrote the state's law which deregulated the industry. The original proposal was written in 1994 by free-market appointees to the PUC. But it was immediately supported by a coalition between PG&E and its largest industrial customers, called Californians for Competitive Electricity, which included the California League of Food Processors, the California Manufacturers Association, the California Large Energy Consumers Association, and the California Independent Energy Producers Association.
With the blessings of the PUC's free marketeers, and those on the federal commission as well, the utilities were allowed to set up unregulated subsidiaries in the early 1980s. Today, PG&E's subsidiary, US Generating Co., and SoCal Ed's Mission Energy, operate many unregulated plants out of state, bringing in huge profits. By 1995 the U.S. Generating Co. was already operating 22 power stations from coast to coast, with a combined capacity of 4800 megawatts. By 1997, USGen owned most of the power plants in Massachusetts.
The profits made from California ratepayers paid for the investments in those plants. Thirteen US Gen facilities alone represented an investment of $4.2 billion. And because USGen is unregulated, it operates numerous coal-fired plants (illegal in California), which pollute the atmosphere more than those using any other fuel. But because coal-fired plants are the cheapest to operate, except for hydroelectric facilities, they are very profitable.
The unregulated subsidiaries are also non-union, with little incentive to invest in a stable, high-paid and high-skilled workforce.
While buying plants elsewhere, PG&E stopped building power plants in California in 1993, and even bought up five plants belonging to independent power producers and shut them down. The deregulation bill, AB 1890, required the selloff of the utilities' remaining California generation plants. The plants' new owners, with no regulatory cap on prices, raised them astronomically on power which the utilities were required to buy.
Deregulation has created a shrinking club of gigantic unregulated power generating companies nationwide. PG&E and SoCal Ed are both members of the club.
Turning control of the system back over to them, even in the old regulatory framework, ignores their obvious conflict of interest. Both utilities are much more interested today in the fate of their unregulated subsidiaries, and the enormous profits to be made from the power they generate, than in providing electrical service to California customers at reasonable rates. Some generators are even using the crisis to call for building high-pollution, high-profit plants in the state once again, overturning two decades of hardwon environmental protections.
The only future for ensuring an adequate, environmentally-responsible power supply, and controling its cost, is if the state itself takes over the system. In Los Angeles, Sacramento, and a handful of other California cities, prices are stable, and have been for years. These cities own their electrical systems. They offer conservation programs and invest in cleaner power sources. Los Angeles generates so much power it's been able to sell excess during the current crisis, keeping rates there low.
The experience of Los Angeles and Sacramento demonstrate that electriciy can be efficiently provided by the public sector, where the pursuit of profit doesn't override rational decision-making.
The state really has no other option which can ensure cheap dependable power other than running the system itself. PUC Commissioners Wood and Bilas have both suggested looking at public ownership of some section of the utility industry through municipalization or state authority. Even the governor has hinted at it.
California doesn't need a bailout of the big utilities that leaves them in charge. If rates are to go up 9% to stave off their bankruptcy, that increase should be a down payment on a new public system that can provide dependable service at its true low cost.