Louis Proyect lnp3 at
Fri Jan 26 08:10:02 MST 2001

NATION Magazine
FEATURE STORY | February 12, 2001

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

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.

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