California Power Crunch:
Investing Less in Electricity and More in Speculation

Jan 22, 2001

Over the last several months, California has been hit by a power shortage that has gotten increasingly worse. In the middle of January, northern and central California were hit by rolling blackouts. People were trapped in elevators and traffic was snarled. Up and down the state, schools and businesses closed, sending hundreds of thousands home.

From Monopoly to Deregulation

California was the first state to go ahead with the deregulation of its electrical utility industry. Prior to deregulation, most of the electricity in California was provided by three large utility companies that were vertically integrated monopolies, that is, they owned the production, transmission and distribution of electricity. The rates they charged were regulated by the government, which saw to it that they were guaranteed a relatively high profit.

The deregulation law, passed by a unanimous vote in the state legislature in 1996 and in effect by March 1998, changed the structure of the industry. The big private electric utilities sold off most of their power plants to other companies. Power brokers, often the same companies, were allowed to buy and sell electricity like any other commodity, like pork bellies or orange juice. As for electricity customers, they were supposed to be given a choice between different companies supposedly competing to provide them with power.

The promise was that by bringing in many more companies, "deregulation" would bring more competition and efficiency, pushing the high prices down. The reality obviously is just the opposite, and could only have been that. After all the electric utilities not only agreed to the law, but also wrote most of it.

From Production to Speculation

The electric utilities had been preparing for deregulation for quite some time. They had not invested in new capacity to produce electricity for over a decade, and no new plants had been built in California for almost two decades. Of course, this did not stop them from still charging consumers for the cost of new investment, and pocketing the difference. At the same time, given that the demand for electricity was still growing, due to an expanding population and economy, it meant that the utilities’ older, obsolete plants were worth more. So when deregulation came, the utilities sold them for a premium. The companies that bought them up–only to then sell the power they produced back to the utilities–took on big debts, so they added the price of these debts to what they charged the utilities for electricity.

Deregulation left the utilities as distributors and traders of electricity in California, no longer producers of it. As for the billions of dollars that the electric utilities received for selling their plants, they used that to buy back millions of shares in their own stock, buy up land, and buy up other utility companies in other parts of the country and all over the world. In other words, with deregulation, the electric utilities freed up a large investment in the production of a basic commodity, electricity, for the greener pastures of financial trading and speculation.

Today, these same utilities claim that they are going bankrupt because they are being squeezed by the power crisis and that only government aid will save them and the entire California economy from disaster. In fact, they arranged to let the utilities go bankrupt by all the financial dealings and double dealings they engineered. As for their financial "investments," they have carefully shielded them.

This divestiture by the utilities of their power plants was also an attack against their workforce. The utilities laid off most of their work force, which was highly unionized and better paid, while the companies that bought the power plants brought in a non-union workforce, paid much less.

The Public Pays the Cost

The power crisis in California today is hardly a problem of simple "supply and demand," as the public is told over and over again by all those in positions of responsibility, from public officials to the news media to the spokespersons for the big companies. Instead, it is a result of the policies of the utility companies, with the complicity of the politicians and the government regulatory agencies that were supposed to be overseeing them.

Of course, it is not hard to figure out what the electric utilities want: the public will be made to pay, through big electricity rate increases and surcharges, and the diversion of billions of dollars of tax money that should be going to such basic social needs as education and health care, sending it instead directly into the pockets of the utilities, electric generating companies, electric traders, etc.

This problem is not limited to California. All through the country, electric utilities have been quietly disinvesting in electric production, and 27 states have already passed some form of deregulation similar to California. As big companies increasingly look to invest in production less, while depending more on financial speculation for profits, people all over the country face worsening service, potential power crises, and certainly much higher costs for electricity.

We will pay ever more for a basic necessity that no one can do without. This is what capitalism has to offer as we begin the new century and the new millennium.