Apr 20, 2001
"Power blackouts are inevitable this summer in California" so warned U.S. Energy Secretary Spencer Abraham in the middle of March, as a prelude to announcing that the Bush Administration would not impose controls over the soaring prices of wholesale electricity. Price controls would, he explained, "seriously aggravate the supply crisis, since they will discourage investment in new generation while eliminating incentives to reduce demand."
Gary Ackerman, director of the Western Power Trading Forum, an industry group representing companies which buy and sell electricity, immediately echoed Abraham's warning: "He's articulated what most Californians refuse to believe, which is we're in the midst of a power crisis and a capacity shortage."
As if to punctuate their words, only four days later so-called "rolling blackouts" cut off power to more than a million customers for periods running from an hour to four or five hours. It was the first time since the end of World War II that power blackouts rolled around the whole state. Restaurants went dark in the middle of lunch hour. Homes and office buildings in many of the state's largest cities suddenly found themselves without power. Traffic signals were down, stalling traffic and contributing to accidents. People were trapped in elevators when the power shut down; hospitals were forced to shift to emergency power in the middle of operations; people who depend on electricity for home-based medical equipment found themselves without power.
The usual explanations were trotted out. Downtown Los Angles, so all the media proclaimed, hit an "unseasonable" 87 degrees. Southern Californians had switched on too many air conditioners. "Demand" once again exceeded "supply."
Most of the media forgot to mention that Los Angeles itself, supplied by a municipal electric system, did not lose electricity. In fact, the problem was not too much demand it was a contrived shortage of "supply." The privately run power generating companies increased the amount of power they took off line by 2,655 megawatts much more than the 615 megawatt increase in demand. In fact, the power generating companies had a total of 12,367 megawatts off line for so-called "routine maintenance," almost half as much power as they were supplying when the lights were shut off.
It's a thumbnail sketch of the contrived "electricity shortage" which has been rocking California for over a year now, from the moment when the terms of California's electricity deregulation became fully operational.
Before deregulation, the map of electrical service in California was a crazy quilt of different companies, organized on a number of quite different bases. The majority of the state derived its electricity from three large investor-owned utilities: Southern California Edison, PG&E (Pacific Gas & Electric) and SDG&E (San Diego Gas & Electric). These three companies, which also produced and transmitted electricity, enjoyed a monopoly franchise that gave them the sole right to deliver service in the areas of their franchises; in exchange, their rates and terms of service were "regulated" by the state, and to some extent by the federal government. Exempted from these regulated service areas were some 30 cities, including LA and Sacramento, which produced and/or distributed their own electricity at lower rates than did the privately owned utilities; federal hydroelectric systems which provided service to military bases and other federal facilities in the state, as well as to some cities and to a number of small rural co-operatives; and some major industrial companies, which generated their own power.
Finally, there was the very special case of San Francisco's publicly owned power-producing system, which was given a federal grant in 1912 to dam and send water to the San Francisco area from Yosemite National Park, under the condition it use the system of dams to also generate and distribute low-cost electric power to municipal and other publicly owned electric systems. By 1925, when the power came on line, San Francisco had built a network allowing it to transmit power all the way to Newark, on the outskirts of San Francisco, only to stop construction, pleading lack of money. Instead of distributing its cheap electricity to the population, the City of San Francisco sold it at a very cheap rate to the predecessor of PG&E which then distributed it at a very high rate to residents of San Francisco. After a long investigation, a grand jury concluded in 1940 that the very same power which PG&E had purchased at Newark for two million dollars was resold to San Francisco consumers for nine million. In that same year, the U.S. Supreme Court ruled that San Francisco had been violating the terms of its federal grant, and put it under order to establish its own municipal distribution system. In the six decades since, there have been numerous other court orders and other grand jury investigations that found San Francisco and PG&E colluded to violate the court orders; nonetheless San Francisco, under one very liberal Democratic mayor after another, continued to directly supply PG&E with very cheap power, while San Francisco residents continued to pay one of the highest electrical rates in the state.
This was the situation in California before the industry was "deregulated." A similar situation holds in most other states, although states in the Northwest have more access to publicly generated power; the utilities of one state, Nebraska, are all publicly owned; while states along the East Coast have much less publicly generated power.
No matter how utilities were owned, the major utilities, supplying the majority of the population, had one thing in common before deregulation: they were "vertically integrated," that is, the same company was responsible for producing power, transmitting electricity over its grid, obtaining additional power from other companies when necessary and distributing all the electricity to its customers in an area it monopolized under a state granted franchise. The investor owned utilities were regulated, on a state by state basis, concerning rates, new construction and terms of service.
The groundwork for California's deregulation was established by two federal laws one in 1978, the more important one in 1992.PURPA (the Public Utility Regulatory Policies Act) was passed in 1978, during the Carter Administration, under the pretext of freeing the U.S. from "OPEC's grasp." It required utilities to connect with and buy power from producers of "alternative energy" (that is, not based on the burning of fossil fuel). Not only did PURPA open the way for other companies to enter the electric power field including many of those that were selling natural gas (that is, fossil fuel); it also gave the utilities the right to increase their rates and thus their profits for producing "alternative" power. These higher charges were justified under the mantra of "making the U.S. energy sufficient."
EPA (the Energy Policy Act of 1992), passed during Papa Bush's Administration, went much further in changing the structure of the electric power industry. It exempted wholesale producers and marketers of electricity from much of the federal regulation which heretofore had prevented large interstate utilities from developing. To answer charges that this would allow large interstate monopolies to grow up, thus escaping regulation of their rates by states, it charged the FERC (Federal Energy Regulatory Commission) with overseeing but not setting prices of wholesale electricity. It also required utilities to open their grid and their final distribution systems to wholesale producers of electricity. EPA was pushed forward, and passed with the overwhelming support of both parties, under the pretext that new providers of electricity would spring up and "competition" between them would pave the way to greater efficiencies, lower prices and better service.
Almost as soon as the 1992 federal law was passed, industrial corporations in California, looking to contract for power with companies other than the three utilities began to push for full "deregulation" of the electric power industry, that is opening up the retail franchise still held by the utilities. In the beginning, the three utilities opposed deregulation. After all, regulation meant that they were protected from the vicissitudes of the marketplace. They were guaranteed a certain comfortable rate of profit, calculated on their expenses of generating and supplying electricity, with all their investments amortized by bonds whose payments were included in the total bill. But relatively quickly, it seems they decided that "deregulation," if worked right, might be a bonanza for them also. In any case, they joined in the push for retail deregulation. In 1996, David Takashima, Edison's main lobbyist at the state capital, was loaned to the office of Steve Pace, the Democratic state senator whose committee was charged with writing the deregulation bill. By all accounts, it was Takashima who brought in the bill to be presented to the California legislature.
The legislature rushed to give the utility industry what it wanted, taking only three weeks to pass its bill unanimously. Not a single voice of opposition was heard. Both Democrats and Republicans hailed the deregulation bill, calling it a promise for cheap electricity for California.
California's deregulation was designed, supposedly, to introduce "competition" into an industry which, by the nature of its technology and investment patterns, had been highly monopolized. Deregulation required the three utilities to divest themselves of most of their electric power production facilities. With "competition" thus assured, the utilities were to be freed from further state "regulation." Once again, it was "competition" and the free market that was touted as promising lower rates, more efficient service and new investments in the aging power infrastructure.
In fact, the utilities did not sell most of their production facilities, nor did the law require them to do so.In fact, the law allowed the "parent" company of each of the utilities to establish still more subsidiaries, completely freed from any regulation whatsoever, to which they transferred the most profitable plants of their utility company. According to a statement issued by the Foundation for Taxpayer and Consumer Rights last December, Edison still retained 70% of its production capacity either directly in its own name or in the name of other subsidiaries of its "parent," Edison International. PG&E transferred its hydroelectric system, which generates 15% of California's electricity, to U.S. Generating Company of Maryland, a wholly owned subsidiary of PG&E's "parent" company, PG&E Corp. Effectively, the utilities used the requirement of divestiture to get rid of the plants they no longer wanted their "alternative energy" plants, which had higher costs of production, and their oldest fossil fuel plants. Finally, the changes in federal and state law together now allowed the utilities to invest their profits in production facilities in other states and countries, as well as in other industries.
Despite the claims that deregulation would give consumers the "right to choose" their own supplier of electricity, up until now effectively there has been no one else from which residential consumers could choose, no competition to lower rates. By contrast, industrial users have been given not only the right, but also the possibility to choose. In only three years time, big industrial corporations had signed contracts with other companies for one- sixth of the power that the utilities had previously supplied them, at rates averaging 15% less than they had been paying.
The most important feature of California deregulation was that it effectively allowed the utilities to escape responsibility for providing electricity. Deprived of their monopoly status so the argument went the utilities no longer had the means to operate their whole system from production to final distribution of electricity. The 1996 California deregulation set up two "non-profit" entities, charged with that responsibility. One was the Power Exchange, which was to bring together the buyers and sellers of electricity in a kind of mini-commodity market, where rates were set minute by minute by the availability or lack of power, and where the same kilowatt of electricity might be bought and sold many times before it reached the final consumer, pushing up its cost on each sale. The other was the ISO (Independent System Operator), which was to buy electricity on an emergency basis in order to keep electricity in the grid when it couldn't be obtained through the Power Exchange. It was by holding electricity back from the Power Exchange that producers were to push up prices so astronomically for the ISO, a practice which the producers called "gaming the ISO."
The law instituted a rate freeze which was to last up to four years or whenever the three utilities had recouped payment for their so-called "stranded assets," whichever came sooner. "Stranded assets" were those installations whose investment had not yet been paid off or whose current condition made them non- economic to run. Today, the utilities speak of this rate freeze as something which has trapped them. But in fact, their rates were frozen at a very high level, almost 50% higher than the average rate for the country as a whole, after having been regularly raised in the years preceding deregulation. These frozen rates included reimbursement for all the costs of producing and distributing power, plus an 11.75% profit margin. Added to these high rates were charges for the "stranded assets." The total bailout for the "stranded assets" of all three utilities was expected to be 20 billion dollars over four years.
But "deregulation" had to be sold. And rates frozen at such a high level were hardly a good selling point. At the last minute, the state legislature wrote into the law a "guarantee" of rate cuts totaling 20%. Half of this rate cut was to become effective on March 1, 1998, when deregulation went into effect, the other half as soon as the "stranded assets" were paid off, in any case, no later than April 1, 2002. This "rate cut" had a strange aspect, however. It did not actually deprive the utilities of any revenue. The utilities were given the right to issue bonds to cover the revenue it cost them, bonds which they sold a year before the rate cut and which were to be paid off including, of course, with interest by a charge added to the bottom of consumer's bills for the next ten years.
Surprise: the very first result of this arrangement was an enormous increase in profits for the three utilities. In the first two and a half years after deregulation went into effect, Edison and PG&E made 4.4 billion dollars in profit in addition to the 17 billion dollars they rolled up for their "stranded assets." The two utilities, which were soon to threaten bankruptcy, also raked in 5.6 billion dollars selling off some of their oldest plants at a premium to out-of-state utilities or energy producers. Some companies paid as much as two and a half times a plant's market value, indicating, as an article in an on-line brokerage service declared, "just how lucrative executives believed the market to be."
Right up to the end of 2000, Edison's and PG&E's parent companies were buying up power plants and other companies outside of California and repurchasing their own stock. According to filings made with the Securities and Exchange Commission, this buying spree came to a grand total of 22 billion dollars in a little less than two years time, most of which was produced by the two utilities directly or by power generating companies which the parent companies had set up when they took over many of the plants.
As for SDG&E, it took in so much money it was able to retire all its "stranded assets" by July of 1999 2 years and 8 months early at which point rates for its customers were unfrozen. Now rates would go down or so the politicians who passed deregulation had promised.
But the most amazing thing happened: electricity rates in the area serviced by SDG&E soon shot UP. The spring of 2000, it seems, was "unusually hot"! Power, it seems, was scarce. Consumers were warned of the possibility of blackouts. During the month of May 2000, the price of energy on the Power Exchange jumped past $100 a megawatt hour the price for which had been only $30 five months earlier. Blackouts rolled around the state in June, cutting off power to 100,000 customers. Prices of power sold on the Power Exchange continued to shoot up, reaching $150 in June for a megawatt hour.
In fact, there was no shortage of electricity in the spring and summer of 2000 in California, despite all the claims. The very peak demand for power was, according to the ISO, 45,600 megawatts of electricity, which was 14,400 megawatts of electricity less than the total supply potentially available to the state in 2000. Later studies of ISO records clearly showed that the utilities and other power producing companies had waited to take their generating facilities off line for ordinary maintenance and repairs until they were in the midst of the hottest days of the year, when demand for power was the greatest and when in the past, they never would have shut down.
The utilities, already rolling in money, were simply laying the groundwork for enormous rate increases. SDG&E, now freed from any regulation of rates, within a year tripled its rates to consumers. Business Week commented on February 5 of this year, "Rate increases are unpopular, but they're a necessity in a free market."
Necessity? In any case, they were certainly the aim of deregulation.
The three utilities were not the only companies to gather in enormous profits in this situation.
The seven biggest publicly held generating companies which together produce 40% of the power for California increased their profits in 2000 dramatically, with quarterly increases running as high as 700% over the year before. The five California power plants which Reliant Energy bought from Southern California Edison, for example, produced over one-third of its total income last year, even though they were only a small part of its holdings. "It has proved to be a good acquisition for us," said a Reliant spokesperson, in the understatement of the year, when interviewed by an Associated Press reporter in early February. Reliant Energy, which had been number 114 in the 1999 "Fortune 500," shot up to number 55 in 2000. Duke Energy, which also moved into the California market, moved up from number 69 to number 17.
The El Paso Natural Gas Company is another of the oil industry companies which rushed into the state of California to take advantage of deregulation, "to compete" as they say. In 1996, El Paso Natural Gas, a subsidiary of El Paso Energy, was a pipeline company that transported natural gas from Texas to the electric utility generators in California and Arizona. Under oil industry deregulation it was required to sell space in its pipeline. In a somewhat secretly arranged auction it sold off 40% of the space in its pipeline to ... El Paso Merchant Energy, another subsidiary of El Paso Energy. El Paso Merchant used its control of 40% of pipeline space to reduce transmission of natural gas into California for its utilities, raising prices from $2.38 a million BTU's the month before the pipeline was shut, to $12.69 the month after. This allowed El Paso Natural Gas to raise prices on the electricity it was generating in its 25 California "alternative energy plants" which it had bought up from two of the California utilities and which weren't even fired with natural gas!
This maneuver by El Paso to reduce the flow of natural gas into the utilities was not taken against the interests of the California utilities. Far from it. In 1996, executives from El Paso Natural Gas met with executives from Southern California Gas and San Diego Gas & Electric in Phoenix. A Los Angeles Times investigation dug up notes made by an El Paso vice-president at the meeting, notes which show that the three companies agreed to kill pipeline projects that would have brought more and cheaper natural gas into California to fuel its utilities. Within four weeks of the Phoenix meeting, Southern California Gas cancelled its plans to build a new pipeline in the southern part of the state, giving the project over to El Paso to do what it wanted, which turned out to be nothing; El Paso, in turn, halted work on a northern pipeline which would have brought in cheaper Canadian gas.
In the words of Ralph Eads, an El Paso Energy executive vice-president, "We view a power plant or a gas contract as a [stock] option: to decide to produce electricity from gas, or not to produce but sell the gas directly, or to hedge a contract to protect against price volatility."
In less than five years, El Paso Energy, trading energy like shares of stock, parlayed a two-billion-dollar pipeline stake into a 50-billion-dollar financial conglomerate, controlling dozens of companies. According to the Los Angeles Times, El Paso Energy, after going on a buying spree, "owns a stake in key sectors across the energy spectrum collecting, transporting, marketing and generating and has access to virtually every market in the nation with the exception of the Pacific Northwest...boasting that it moves a quarter of this country's natural gas to 70% of the U.S. population." So much for introducing "competition"!
Dynegy, a Texas natural gas trader which used profits made from natural gas regulation to buy up two old power plants in southern California, made so much from those plants in three years that it was able to spend four billion dollars to acquire Illinova, the holding company which owns Illinois Light & Power, a utility serving the southern part of Illinois.
Finally, there is Enron Corp., a "marketing" company, that is, a company which neither produces nor distributes electricity and natural gas it only buys and sells them. Business Week describes Enron this way: "it has pioneered the financialization of energy, making the company more akin to Goldman Sachs than Consolidated Edison. Its impressive profits stream is squeezed out of a torrent of often low-margin trades, in which it buys and sells a dazzling variety of contracts." Between 1997 and 2000, Enron's profits tripled. It, too, has zoomed up in the "Fortune 500," going from number 94 in 1996 to number 18 in 1999 to number 7 in 2000. Its CEO earned a 7 million dollar bonus in 2000, up from only 3.9 million the year before.
We shouldn't, of course, forget the financial markets, when recording the rogues' gallery of profit-makers. The divestitures, acquisitions and mergers which have accompanied deregulation have been in great part underwritten by Wall Street. On California's bonds, alone, their commission will mount up into the hundreds of millions of dollars.
When the politicians talked about deregulation producing "competition," they forgot to explain that whatever competition might develop was only to see which company could make the most profit, not which one would charge the lowest prices.
As spectacular as the summer of 2000 was, it was only a pale hint of what was to come. Demand for electricity went down in the fall, as it usually does, but "shortages" inexplicably got worse. In December, a month when usage was low, Californians were told they had entered a "Stage 3 Alert," that is, they could be subjected to blackouts for an hour or more with no advance notice. When blackouts were ordered, almost one third of California's total capacity was off line for "routine maintenance" and it was kept down.
With blackouts punctuating the bidding, wholesale power prices became the subject of wild speculation on the commodity markets. The average price in December was almost $275 a megawatt hour, nine times what it had been the year before. And in the "spot market," a megawatt hour of electricity several times hit the astronomical level of $1500.
The two utilities whose rates were still frozen produced balance sheets to prove that they were bleeding money. The rate freeze, so they said, had prevented them from passing through six or eight or twelve billion dollars (depending on which week it was) of what they paid for electricity in a half year's time. Threatening bankruptcy, they demanded an end to the rate freeze, despite the deregulation law.
Of course, the balance sheets produced by Edison and by PG&E were somewhat incomplete: they forgot to include the amount of money they each made in selling electricity wholesale, either directly or through subsidiaries of their parent companies. It's true the two utilities had to purchase electricity in the state's Power Exchange at a big loss. BUT, both Edison and PG&E sold power they produced into that same exchange at a very big gain. PG&E's hydroelectric installations, for example, produced power at the rate of $1.40 a megawatt hour (that's right, one single dollar and forty cents) while the going rate when they peddled that same hour of electricity was in the hundreds of dollars.
Also missing from their balance sheets was the money they had paid out in huge dividends in August 2000 to... their parent companies, thus ridding themselves of any excess cash they might have been able to use to buy electricity. Finally, in the short period between the summer's mini-crisis and December, Edison and PG&E both moved billions of dollars of assets over to the unregulated subsidiaries of their parent companies. As late as January, PG&E's parent company set up still another subsidiary, the National Energy Group, to which it transferred PG&E's power trading and merchant generating operations.
The two utilities didn't speak of these things and the California Public Utilities Commission didn't ask. It quickly put through a rate increase ranging from 9% to 15% in early January.
Not enough, said Wall Street. Two bond-rating agencies downgraded the two utilities' debt to little better than junk bond quality, effectively making it impossible for them to borrow further. The third, and last, agency threatened to do so. Their stock fell dramatically. It appeared that bankruptcy was almost a certainty. The big energy producers announced that as of March 1, they would cut off all credit to the utilities for natural gas which the utilities use in their own generating plants. More blackouts rolled around the state.
Credit Suisse First Boston Corporation noted on its website that the blackouts were "likely intended to soften up the Legislature and the voters to the need for a rate increase....That prospect [of blackouts] helped energize some legislative and banker concessions that got us over the hump." These comments came in an article in which the Wall Street firm encouraged investors to acquire holdings in power generating companies which supply electricity to California. The same Wall Street firm also provided experts from its financial department who for no charge helped the Democratic speaker of the California legislature write another bailout bill for the two utilities. (With the kind of explanation that only a politician could dream up, the speaker explained that he had originally intended to pay Credit Suisse until he realized that payment would create a conflict of interest because Credit Suisse has clients in the energy business! Of course, this "conflict of interest" didn't prevent him from accepting and acting on their advice freely given!)
After a spate of posturing by the state's politicians, the state legislature voted the bailout written for them by Credit Suisse. Ten billion dollars in bonds would be floated, to be repaid by consumers in their bills, to cover the utilities' losses. Another five billion was voted by the legislature to begin buying power in the spot market for the two utilities.
As if by magic, the utilities debt received the approval of Wall Street. And brokerages began to recommend buying up issues not only from the power generating companies but also from the parent companies of the two utilities.
Equally magically, the threat of blackouts suddenly ceased until January's extortion drama went into re-runs in March. On the same day the power went out in March, California's governor, Gray Davis, asked the state legislature to authorize an additional half a billion dollars to buy power for Southern California Edison and PG&E, two of the state's three major investor owned utilities, both of which were once again threatening to declare bankruptcy if they were forced to go on buying electricity. The state legislature also gave its approval for purchasing their grid, that is, the high tension electric transmission lines which transfer power between producer and distributor. The price is estimated to be about seven billion dollars, about two and a half times the value the three utilities themselves had placed on the grid. And not only will the state pay to buy the grid, then to run it, it will also have to pay a billion or so more to make the repairs which the utilities had neglected. (It appears, however, that PG&E wasn't interested probably figured it could get a still better price.)
More bonds are to be sold, increasing the state's indebtedness by almost 80% in less than a year's time. Already politicians are discussing the need to cut back "non-essential" programs. In other words, Californians can expect to see cuts in all those programs which benefit the population as we've learned by now, those are the programs the politicians consider "non-essential."
Finally, at the end of March, the legislature, the governor and the Public Utilities Commission all agreed on new rate increases running as high as 47%.
Will the bonds and all these rate increases resolve the problem? "Heavens no!" answered Assemblywoman Jackie Goldberg, who added, "It's a necessary step, but we're certainly not out of the woods yet."
The producers of electric power justified their sky-high wholesale rates by criticizing California for not having signed long-term contracts for power these supposedly would have insulated the state against the price "spikes." But when the state recently opened an auction for long-term contracts, offering a rate of $69 a megawatt hour, double what electricity had been selling for before the crisis began, very few sellers of power were willing to sign up. The Los Angeles Times commented, "The contract price won't really matter this summer, because almost no electricity will be available under the contracts. If the state or utilities are forced to go to the spot market in times of peak demand, the costs will be closer to $400 a megawatt hour."
In the same week, while "experts" predicted 20 or so hours of blackouts this summer, Reliant Energy, which certainly has the inside track, issued a prediction that Californians will face 1,100 hours of blackouts.
So, no, Californians are "not out of the woods yet" and the woods are filled with jackals.
As if to emphasize the point, PG&E, after having racked up enormous bills, including to the state, after having divested almost all its profitable assets to other subsidiaries of its parent company, issued bonuses totaling 50 million dollars to its top 400 management people in early April only to declare bankruptcy two hours later.
By the time the crisis in California broke out in the open, 24 other states had either deregulated or were in the process of doing so. And while their experiences were not so horrendous, they were nonetheless telling. In 1999, New York state and Illinois had both undergone a series of blackouts and price spikes. Rates in New York were more than 40% higher during the summer of 2000 than the previous summer.
Nowhere did the results inspire much consumer confidence. But what happened in California put the issue on a whole different level. Several states, including Arkansas, Nevada, New Mexico and West Virginia, declared a moratorium on deregulation. One state, Oklahoma went so far as to revoke the implementation of its deregulation law. And several states which had been considering the matter either let it drop or voted against deregulation.
A campaign was begun, blaming California's supposedly "uncontrolled appetite for electricity" for what was beginning to happen elsewhere. Business Week, for example, proclaimed, in its February 5 issue:
"The fallout from California's eight-month long electricity crisis is spreading rapidly: Factories are closing in Montana and Washington. Utilities are asking for or already have won double-digit rate increases in Idaho, Wyoming, Nevada, and Oregon. The repercussions are being felt as far away as Pennsylvania, where GPU Inc. has asked regulators for permission to charge customers an additional $145 million to cover the cost of buying power in the sky-high wholesale market." It went on to quote Chuck Watson, chairman of Dynegy, one of the new energy marketing companies: "California sucked all the electricity from the Western states. It is reverberating throughout the country.'"
Similar comments flowed out of the White House day after day. California was turned into a national pariah, draining power from everywhere, pushing up electric bills everywhere. The problem, according to Bush, was to put a wall up around California, to prevent California's problems from bringing down the electric grid of the whole Western half of the country, if not the whole country.
In state after state, utilities sent out notices with their electric bills explaining that although the market was in the process of deregulation in their state too, consumers need not worry, that California was "different."
Reassuring words notwithstanding, California does present a picture of the future, and not a pretty picture at that. If California did it badly, then so will the other states: most of their deregulation laws were modeled after California's. According to a study issued by the U.S. Department of Energy in 1996, the bill for "stranded costs" could reach as high as 500 billion dollars nationwide. And Pietro Nivola, a Brookings Institute expert in regulatory policies, commenting on what can be expected, declared, "The whole notion that there's such a thing as a just price is kind of an anachronism from New Deal days. Especially as we move closer to some form of deregulation, we've come to understand that the price is what the traffic will bear."
There may be some differences in the language of the laws from state to state, but all the laws, federal and state, have a single aim: to free up companies which already were enormously profitable, leaving them the possibility to charge whatever the "traffic" that is, the market would bear. And, as we've seen in every state where deregulation has progressed very far, the market will bear quite a lot.
In many countries, electric utilities were built up by the state power, precisely because of the unwillingness or inability of private capitalists to undertake the enormous investment required to build the infrastructure needed to deliver electricity widely. In the United States, publicly owned municipal systems appeared in the 1880s and 1890s. But gradually, private capital moved in to take them over, then to build them, under monopoly franchises bestowed by states or cities.
Samuel Insull, one of Thomas Edison's first lieutenants, pushed the idea of state regulation, as a way to justify private capital's control over the industry. According to the Edison Electric Institute, the electric utility industry trade group, Insull's proposal for state regulation "became increasingly appealing to investor-owned companies in the face of public enthusiasm for the growth of municipal [that is, publicly owned] electric systems. Privately owned companies surmised that the public might be more supportive if their companies were regulated so that customer interest could be protected."
The problem was not simply that of convincing the "public." The fact is that private capital was unable to standardize the industry. Equipment, frequencies and voltages varied from one utility to the next, making connections or transfer of power difficult or even impossible, not to mention the impediments this chaotic situation put in the way of widespread production of electric appliances. Nor was private industry able to provide the capital necessary to build up an electric power industry; that was assured by the state agencies which set rates. Whatever limits states might have set on the upward movement of rates, the fact is that state oversight of the utilities guaranteed the fledgling electricity industry not only a more than adequate profit, it also guaranteed the reimbursement of investments.
The development of the utilities kept pace with the vast expansion of capital which had marked the end of the 19th century, leading to ever larger companies, greater concentration of capital and eventually the great financial trusts or "holding companies" which were monopolizing and controlling almost every important industry. By the 1920s, stock market speculation led to a vast movement of mergers and acquisitions, creating super-giant empires.
The utility industry was one of the most highly concentrated. During the decade running from 1919 to 1928, over 4300 utilities vanished, most gobbled up by other companies. Three quarters of these were in the electric utility field. By 1932, 42% of the electricity which was generated in the United States was controlled by only three holding companies, 85% by only 16 companies. Holding companies which were tied directly or indirectly to J.P. Morgan controlled almost half of all electricity produced.
The classical example of these holding companies was the empire set up by the same Samuel Insull who had earlier argued so strongly for state regulation. Georgia Power Company was only one of thousands of utilities producing and distributing power which sat at the bottom of Insull's empire. Georgia Power was controlled by Seaboard Public Service Corporation, which owned just enough of Georgia Power's voting stock to control all its assets. Seaboard, which did nothing but buy and sell companies, was controlled in the same way by the National Public Service Corporation, which itself only bought and sold stock. In turn, it was controlled by another such company, the National Electric Power Company, which in turn was controlled in similar fashion by the Middle West Utilities Company, which owned 111 other companies and was itself owned by Insull Utilities Investments, which also owned three other such holding companies: the Public Service Company of Northern Illinois, the Commonwealth Edison Company and the Peoples Gas, Light & Coke Company. Insull Utilities was owned by the Corporation Securities Company of Chicago. Of course, nothing was simple in this vast scheme: while Corporation Securities owned 30% of Insull Utilities stock, Insull held 13% of Corporation Securities. And Middle West Utilities, further down on the pyramid, owned 2% of Corporation Securities. Insull himself was chairman of the board of 65 different companies in his pyramid. His son directed dozens more.
An executive of General Electric once described the Insull holdings this way: "It is impossible for any man to grasp the situation of that vast structure... it was set up so that you could not possibly get an accounting system which would not mislead even the officers themselves." Not to mention the impossibility of any public regulatory agency, organized as they were by state or even locality, to assess the real costs and income of utilities so controlled even if it had wanted to do so.
The holding companies charged the utilities which rested at the bottom of their pyramids exorbitant amounts of money for "financial services," for construction carried out by other companies owned by the same financial group and for fuel which was supplied by still another of the group's companies. According to a study done at the time by the Congressional Research Service, "a holding company might own unregulated coal mines in addition to its regulated electric utilities. The regulated utilities might buy coal from the unregulated affiliated coal mines at 50% above the prevailing market rate. The profit would accrue to the coal company while the cost would be passed on to the electricity consumers by State regulators who could not control the internal activities of the interstate holding company."
The great trusts composed of these holding companies were not involved in directing and coordinating the supply of electrical service. Nor were they interested in extending electrical service throughout the nation. Nor were they concerned with integrating far-flung electrical systems into coherent networks which could provide back-up supplies of power when systems went down. Capital's concern was the creation of far-flung financial empires and the accumulation of financial rewards.
As a result, as late as 1932, nine out of ten farms nationwide were still without electricity. In the South, it was worse; in Mississippi, less than one in a hundred had power. And blackouts were common in the cities which did have power.
In the utility industry, these holding companies built up what came to be called "pyramids" structures which allowed a relatively small amount of capital to control a vast empire. By means of such arrangements, one dollar invested in Insull Utility controlled $1750 in assets of Georgia Power. These holding companies were built up on enormous amounts of debt, as each company which bought up another issued bonds or non-voting stock to pay for its investment. Today, this is called a "leveraged buy-out." The bursting of the speculative bubble in the 1920s brought about the collapse of most of these pyramids and the shutting down of electricity in wide- spread areas of the country. In 1932, when Insull's Middle West Utilities went bankrupt, electricity was cut off to five thousand communities in 30 different states.
It was in response to these disasters that the PUHCA (Public Utilities Holding Company Act) was passed in 1935. Whatever concern Congress and the Roosevelt Administration had for consumers was far surpassed by their concern for all those businesses harmed by the collapse of electric power and for the bondholders and stockholders sucked into these schemes. Shareholders lost an estimated 700 million dollars in just this one collapse.
The PUHCA established limits within which holding companies could act. Effectively, it restricted utilities to functioning within a single state, or at least a closely connected geographical area. And it limited these companies to three layers, which made their books somewhat less opaque. Finally, holding companies were limited to owning productive companies which were functionally related to the service they provided. As usual, there were loopholes, and very large ones. And no utility ever went broke while it was regulated other than through outright fraud by a utility management. But the PUHCA, and the regulating agencies which derived from it did allow the utility industry to start functioning again, providing what other industries needed, a stable and consistently priced supply of power.
Other legislation in this same time period paved the way for extending electricity throughout the country via the great hydroelectric projects like the Tennessee Valley Authority, Hoover Dam, and the Grand Coulee, Bonneville and Shasta projects; and via economic encouragement for rural cooperatives.
William E. Leuchtenburg gave a striking picture of what the development of electricity cooperatives meant in rural areas: "Farmers without the benefit of electrically powered machinery, toiled in a nineteenth century world; farm wives, who enviously eyed pictures in the Saturday Evening Post of city women with washing machines, refrigerators, and vacuum cleaners, performed their backbreaking chores like peasant women in a preindustrial age.... The REA [Rural Electrification Administration] revolutionized rural life. When private power companies refused to build power lines, even when offered low-cost government loans, Cooke [head of the REA] sponsored the creation of nonprofit co-operatives. In the next few years, farmers voted, by the light of kerosene lamps, to borrow hundreds of thousands, even millions, from the government to string power lines into the countryside. Finally, the great moment would come: farmers, their wives and children, would gather at night on a hillside in the Great Smokies, in a field in the Upper Michigan peninsula, on a slope of the Continental Divide, and, when the switch was pulled on a giant generator, see their homes, their barns, their schools, their churches, burst fort in dazzling light. Many of them would be seeing electric light for the first time in their lives. By 1941, four out of ten American farms had electricity; by 1950, nine out of ten."
The electricity generated by federally funded hydroelectric and other projects also helped pave the way for establishing many municipally owned systems, replacing the privately owned ones which had gone belly up with the crash of 1929. Whereas in 1929, over 90% of power was produced by investor-owned utilities, today, even after years of public projects being turned over to private industry for a song, less than 75% is.
Capital was not able to make its own system function without taking it into the enormous financial and industrial collapse of the 1930s. Nor could it provide such things as the basic electrical infrastructure for the country as a whole. It needed the state to build this infrastructure, and it needed the restrictions which its own state set up against its voracious appetite for profit to keep it running.
Electric utilities now join the other industries that have been "deregulated" over the last quarter of a century airlines, financial institutions, railroad and trucking industries, telephone and cable television and natural gas. Electric utilities were, in fact, among the last to be deregulated. The results of these other deregulations in some cases were downright catastrophic; in some they simply drastically increased prices. For example, Consumers Union estimates that the way pricing has been allocated between local telephone rates and long distance rates has left consumers paying $6 a month extra on their local bills since the 1996 Telecommunications Act was passed. In the meantime, long distance phone charges are calculated in such a way as to require those people who use long distance the least, the majority of the population, to subsidize those, the wealthy and especially business, who use it a lot.
Something similar can be seen in all these industries which have been deregulated. The direction of the airline industry, for example, has been toward an increasing monopolization, with mergers and "alliances." Quite obviously, the airlines have divided up the country among themselves, with each airline being given control over a few "hubs." As for the promises once made for cheaper service: service has been cheapened, that's true, with safety compromised, but the price for travel has skyrocketed.
The natural gas industry was deregulated in the mid-1980s. In 1984, just before deregulation, residential prices for natural gas were 44% above the well-head price, that is the price charged to utility customers. Three years later, the residential price had climbed to 110% higher; by 1999, it was 181% above. So-called "competition" brought with it greater monopolization, and much higher prices. In fact, it was the vast amounts of money made in natural gas deregulation that gave a number of companies among them, Enron, Dynegy, El Paso Natural Gas the stake they needed to enter the electric power industry in such a big way.
Then, there was the fiasco of the savings & loan deregulation. Under banking laws passed after the financial collapse of 1929, banks and savings & loans were prevented from making certain kinds of very risky loans and investments. Regulations were removed starting in 1981, with promises that freeing up capital would help get the economy out of its doldrums. In fact, what resulted was a virtual collapse of the S&L system and a somewhat smaller collapse of banks tied to them. In an attempt to stem the losses and prevent a collapse of the whole financial system, the government churned out nearly half a trillion tax dollars, which simply reinforced the financial interests which had created the problem in the first place.
Across the board, deregulation has been accompanied by a rush toward greater concentration of capital, with the enormous increase in profits that could be predicted. In the little more than four years since telephone service has been fully deregulated, the eight large regional phone companies which provide almost all local service in this country have merged into four companies and are now attempting to merge into only two companies. This has not produced the benefit to consumers which was promised. Just the opposite. But this control over the industry has given local telephone companies a return on equity at least 70% higher than the national average.
In the utility industry, 55 applications for mergers were filed with the Federal Energy Regulatory Commission between January of 1992 and July of 2000. As of this January, 44 have been approved, two were withdrawn, the others are still pending. None were disapproved by the FERC. This is the fastest pace for utility mergers and acquisitions since the 1920s, and it has led to a rapid increase of concentration in the electric utility industry. According to the U.S. Department of Energy (DoE), in 1992, the ten largest investor-owned utilities owned 36% of all generating capacity in the country. By the end of 2000, according to DoE estimates, the top ten owned 51% of all such capacity. John Bryson, current CEO of Edison International, the holding company which owns Southern California Edison, recently predicted that there will be only 10 energy conglomerates left worldwide in ten years time. The current disaster in California gives a hint of what that will mean for the prices we will pay for electrical power and decreasing access to it, not to mention the enormous monopoly profits these 10 conglomerates will roll up.
The federal and state deregulation laws of this last quarter of a century, bending to capital's voracious appetite for profit, are now turning the clock backwards and doing it under the banner of what the U.S. Department of Energy recently called "a new school of thought."
No, it's not a new school of thought; it's the very old capitalist marketplace which has never taken into account the needs of the population .
Consumers' Union, in a study prepared in 2000 about the effects of the 1996 Telecommunications Act, proposed as a way to rectify what the 1996 act had done:
"The answer is to insist on effective competition de-monopolization before deregulation. Policymakers must recognize that the monopoly elements in the industry the wires require effective regulation to promote competition in content and services over these wires. If consumers are ever to see the promised benefits of competition in communications markets, policymakers in Washington and the states must begin to be genuinely pro-competitive and worry less about being pro-business."
In fact, all these laws which were passed, freeing up capital from the small amount of regulation which existed before, are precisely the proof that policymakers, whether in Washington or the states are "genuinely"... pro-business. The politicians who passed the deregulation laws are not naive servants of the population who made an innocent mistake. Nor were they duped by people the utility industry sent in to write the laws. They are simply the servants of capital, and they are doing today what capital requires in this bubble economy where production less and less matters, while financial speculation is on the order of the day.
With deregulation, we are returning to the past and not a glorious one. Electricity is a basic service, a necessary one for life to go on in any industrialized society. Yet the people who today control it care nothing for what they are doing, neither to the electrical system itself nor to the population who depend on it.
In pursuit of ever higher profits, they are ready to shut off electricity, creating life-threatening situations. They are ready to rob people of the money they need to pay for their other daily needs, with rates which double, treble then threaten to treble still again. The stories of older people, living on pensions, who must choose between eating and heat or between a medical prescription and electricity are not simply the stuff of urban myths. They are the true picture of where capitalism and its "free market" are taking us today.
"If you believe in markets, you can't blanch at the sight of victims" so said Bill Eastlake, an economist with the Idaho Public Utilities Commission, arguing to continue his state's deregulation "experiment."And that says it all! That is capitalism spelled with a capital "C."
The greed of the capitalists is taking us back to the past. Those politicians in California who, without a dissenting voice, signed on to deregulation know it. If they were innocents who naively made a "mistake" in 1996, hoping to improve things for the population, they would long ago have stepped up and called a halt to this so-called "experiment." Instead, a California legislator warned the power trading companies: "hold down those profits because they will only increase consumer frustration with electricity deregulation."
Deregulation is not an experiment it is simply one more means to let large holders of capital accumulate still more capital.
In the 1930s, the state apparatus had to intervene even just to defend the general interests of capitalism against the greed of every individual capitalist to amass more profit for himself, not only at the expense of the population and even of other capitalists, but even at the risk of bringing their own system to a halt in a financial collapse.
To pray for a new FDR to come along, as some consumer groups now raise the question, is simply to ignore what FDR did repaired the damage that the capitalists had done so that the system could once again provide them the means to accumulate more profit, amass more capital, and in so doing wreak still more damage. The population can't trust the politicians at the head of the state apparatus. Whether they were regulating or deregulating, they have always made their decisions in such a way as to favor of capital, not to defend the interests of the population.
Capitalism hasn't changed since the 1930s. Nor have the capitalists. Regulated or not, they are imbued with the same drive to make profit at the expense of everyone and everything else. Capitalism's "new idea" is to take us back to the past; truly, capitalism has no future to offer us.