by Mike De Rosa
March 13, 2001
Electric deregulation is in the news again as the state of California experiences electric power blackouts and huge price increases in electric rates. California was the first state to "restructure" the generation part of its electric energy system in 1996. A very similar plan was rammed through the Connecticut legislature in 1998 by our lawmakers and Governor Rowland and will go into full effect on January 1, 2004. In both California and in Connecticut ratepayers were saddled with paying off "stranded costs". Stranded costs are the money that utilities insist is owed them for the cost of their previous power plant investments when deregulation took away their electric market monopoly. In California the bailout for utilities has cost consumers $20 billion and in Connecticut consumers are paying out over $2 billion. Stranded costs are paid by you on your electric bill each month and are a subsidy to an incumbent electric utility. This same incumbent utility may have a subsidiary, which acts as an electric "generator" and sells you electricity. In this way the incumbent utility can really never lose.
California was also the first state to actually implement this new electric deregulation and create a "free market" where "competition" among generators would set the price and government regulation would be eliminated. The results of California's experiment are now routinely referred to in the press as a debacle. California is now in the process of spending billions of dollars more on further bailouts and subsidies for utilities and Connecticut may do the same in the future.
California is having an "energy crisis" according to recent news reports. We are told that the sunshine state does not have enough power plants and that is why California is experiencing power grid warnings and brownouts.
Is California really in an "energy crisis"? Many experts and consumer groups are pointing to the fact that California has a large winter reserve of electric power and has had that reserve for many years. According to the North American Electric Reliability Council (NAMERC is a semi-official source), generating plants within California have the capacity to produce about 44,000 megawatts of electricity. Yet huge price increases and blackouts recently occurred when the demand was less than 33,000 megawatts. Dividing unused capacity by demand shows that California actually has an electric reserve of more that 24% during the winter months and has routinely exported this power to northwest states. Energy experts say that a margin of 14% is considered more than adequate. According to the consumer group The Foundation For Taxpayer & Consumer Rights, the energy power supply and demand in California was actually lower during four of the last six months as compared with the same period last year when there were no blackouts or price increases.
A DOMESTIC OPEC?
There is growing evidence that suppliers of electricity in California are manipulating the electric market by running plants at less than full capacity, shutting down plants for questionable maintenance, selling electricity to out-of-state buyers during the "crisis", and engaging in other unfair business practices. The Attorney Generals of California, Oregon and Washington State are now investigating the actions of electric power plant owners in California. Municipal officials throughout the state are also investigating what is really behind this new "energy crisis". According to the NAMERC the national average for planned and unplanned shutdowns is 10%. In California the rate is now on average above 20%. Profits for the in state and out of state energy producers in California have soared to as high as 500% and more.
According to FTCR California's utilities recently used energy blackouts and the threat of bankruptcy as a weapon to force Governor Davis and the California Legislature into allocating $800 million to buy electricity during the "crisis". FTCR goes on to say that California ratepayers could have purchased all of the plants that were sold to private companies under the 1996 "restructuring" legislation for the $2 billion of taxpayer money spent since mid-January to buy high priced electricity. The state is spending around $50 million a day on buying power to keep the lights on in California and guarantee that local utilities will pay their bills and not go into bankruptcy. Two Houston, TX based energy generators selling electricity in California, Reliant and Dynergy, have even argued in court that the state should buy electricity at any rate the generators determine during California's electric emergency. The problem isn't low capacity. Californians are saddled with high prices and shortages due to intentional under-production.
Once again we are reminded that electric restructuring legislation, whether in California or Connecticut, takes us from the era of regulated monopolies to the age of unregulated oligopolies. By definition, oligopolies do not compete they collude. In the 'free market' of deregulation, electric generators set the price at what ever the market will bear, sell to out of state buyers at a higher price, and operate with a free hand in tightening supplies and driving up the price of electricity. Since collusion is hard to prove and electric "restructuring" legislation does not provide for practical ways to protect the public health and safety, we in Connecticut may soon find ourselves in a similar situation with our own electric deregulation law. Unfortunately, our own officials here in Connecticut are taking a wait- and- see attitude toward the events in California and are being told in "public" hearings that there is nothing to get excited about. Recently the Union of Concerned Scientists released a report that found a nearly 50 percent rise in plant outages in New England after restructuring.
THE POLITICS OF EXPERIENCE
The enormity of what is going in California cannot be overstated. Electric rates in the San Diego region, the first area to have a totally deregulated market, have risen 200 to 300 percent. Electric bills that were once $50 a month are now over $150. Rates have also soared in other parts of California. The working poor and people on fixed incomes are being hit hardest. In the wholesale spot market, rates have increased 2000% to 3000%. In contrast, the much-maligned Municipal Utility Districts in California had an overall increase of less than 10% in their electric rates. The M.U.D.'s ability to provide reliability and affordability during this "crisis" only emphasizes the extent of manipulation going on in California's electric market.
The Independent System Operator (ISO), a weak California agency with the job of managing that state's power grid, finds itself powerless to maintain electrical reliability and purchase affordable power for the California ratepayers that it severs. This agency has plant shutdown "coordination control" over less than 20% of the 800 power plants in California. The other 640 plants in the state seem to be able to shut down for just about any reason. The ISO is also hampered by a ("real time") short-term power purchase contract scheme, which requires the ISO to buy electricity at fantastically high rates on the spot market without sealed bids. The California ISO is also unwilling to exert the little regulatory power that it has. No wonder consumer groups have requested Governor Davis to seize the electric generator's power plants using the state's eminent domain statues in order to protect the public health and safety. This is not likely to happen since millions of dollars are donated to the campaign coffers of politicians by the very electric generators and utilities that these politicians are suppose to oversee. Millions more are used by the lobbyists of these electric generators and utilities to pass legislation and buy influence and access to the corridors of power.
Similar events happened here in Connecticut when legislators allowed lobbyists from utilities and electric generators from around the country to spend millions of dollars to pass Connecticut's electric restructuring legislation. These same legislators allowed the "leadership" of both parties to overrule two committees in the legislature who voted down restructuring and then allowed the bill to be reintroduced into the legislature and passed with the help of the Governor all during the last week of the session. If committees in the legislature don't have the power to stop legislation though public hearings and voting why bother having them! These same legislators are now asleep about what is happening in California and are willing to accept the reassurance of people who have a vested interest in continuing the flawed and dangerous experiment called electric deregulation. Some economists see signs that electric deregulation in California is actually having an adverse effect on California's economy. Some think that it might be a factor in slowing down economic development and draining billions of dollars to the oil and natural gas rich south of the United States. Similar effects could happen in Connecticut over the next two or three years as we move toward a totally deregulated electric market.
In New York City and in Westchester County electric deregulation has resulted in 40% increases in rates and the specter of brownouts and blackouts. Recently the mass media has extolled Pennsylvania's electric deregulation effort as "successful". A closer look at Pennsylvania's electric restructuring shows that true deregulation will not take place until 2010 when rates are totally "unfrozen" and price controls are removed. Pennsylvania's plan did not require utilities to sell their power plants and has offered "shopping credits" to all retail customers willing to move to a new generator, thereby subsidizing its own consumers rate decreases. The wholesale price for electric energy has recently increased significantly in Pennsylvania. Energy experts say there is no physical justification for such increases. Some people speculate that it is only a matter of time till rates rise in Pennsylvania as electric generators discover ways to pass on these costs to consumers (or get out of the "market").
The time for action is now. On January 1, 2004 the price controls will come off our electric rates in Connecticut. Already a member of the legislature has suggested that we increase rates to encourage more companies to "compete" in our "deregulated" electric market. This is perverse economics. Competition is supposed to be the driving force behind price reductions not the other way around. If you have to artificially raise rates to encourage market entry, then you don't have a market, at least not one that should be left unregulated. What is the point of competition if the result isn't price reductions? Better customer service? It is not yet clear to our elected officials that there is no market in electric energy in Connecticut and there probably never will be.
There are solutions to the electric deregulation mess. They include a real energy policy for Connecticut, which subsidizes conservation and reduces demand for electricity at its source. We need the will to make major investments in clean and renewable energy plants, which use solar, wind, and tidal power for energy sources. We need a strong state power authority, which will oversee the entire process of supply and demand in electricity use and will keep our hard earned money and energy in Connecticut. We need an elected DPUC, which will answer to us and will re-regulate the electric industry. We need a Citizens' Utility Board, which will research and represent consumers before the legislature and other government agencies. We also need Municipal Utility Districts, which will produce clean and affordable energy and will be locally controlled.
If we do not move in this direction we will find ourselves spending tens of billions of dollars on more bailouts and subsidies, which will go in the pockets of greedy corporations, and we will wakeup to a spoiled environment and a nation without liberties.