California:
Subsidizing the Profits of the Big Electric Utility and Power Companies

Feb 5, 2001

On February 1, California Governor Gray Davis, a Democrat, signed a bill passed by the state legislature. It is a big step in the bail-out of the profits of the two biggest private utilities in the state, Pacific Gas and Electric (PG&E) and Southern California Edison (SCE), which claim to be on the verge of bankruptcy. While the Republican minority denounced the bill, and even blocked it for about 12 hours, enough Republicans voted for it to pass.

Under this new law, the state has been authorized to buy electricity for the utilities. The utilities will turn around and sell the electricity to consumers, at a profit, of course. To finance this operation, the state government will sell about ten billion dollars in bonds. Consumers will then have to pay a large surcharge–to cover the cost of the bonds.

This is a bailout of both the public utilities and the companies that own the plants that generate power. The utilities will not have to bear the future costs and risks of buying electricity on the wholesale market. Instead, the state government, that is, consumers and taxpayers will shoulder those costs. It will be the state government that will sign long-term contracts with the companies that own the power generating plants at a time when prices are at an all-time high.

Most analysts believe that, with the economy turning down, the demand for power will fall, leading to lower prices on the wholesale market. But the state will be locked into those big, hefty prices they agreed to today–prices that consumers will have to pay.

This is a beautiful deal for the two electric utilities, which all their fancy maneuvers can’t hide. These companies are not broke. They simply cooked their books to make their assets disappear. Both companies split themselves into two parts. One part of each company is the utility that sells electricity to consumers. That is the part that appears to be broke. But the other part–the one these companies don’t talk about–owns power generating plants in California, as well as other states and even other countries. In California, for example, PG&E and SCE still own nuclear power plants and hundreds of dams. The cost of producing that electricity is very low, especially from the dams. Yet, they sell electricity on the wholesale market at the same high prices as the other companies, that is, five, ten, or even fifteen times their cost. And who are they selling that electricity to, but to the electric utility that they own. In fact, over 30% of the debt that PG&E and SCE each claim they owe is to themselves!

But the way both companies keep their books, all the profits that the utilities and power generating companies made went into a separate account. According to an audit done by the state, over the last four years the utility part of PG&E sent 4.7 billion dollars to the power generating part. This allowed PG&E to pay 1.9 billion dollars in dividends and 2.7 billion dollars to buy back its own stock. As for California Edison, the utility part paid 4.8 billion dollars to its other half, which then paid 1.6 billion dollars in dividends and 2.7 billion dollars to buy back its stock.

This continued right up through the fall, even while the companies pretended to be losing billions. According to their last financial reports, PG&E paid 108 million dollars in dividends in the third quarter, at same time that it claimed it was losing 2.8 billion dollars. SCE paid 91.2 million dollars while insisting that it lost 2.4 billion dollars. And as a reward for these profits, the chief executives of both companies increased what they paid themselves by a million dollars each between 1997 and 1999.

Of course, the utilities claim that under the deregulation laws written in 1996, all this is perfectly legal–which is true. The law was passed to allow them to do this–and then to extort money from consumers, with the state acting as intermediary. The same thing is true of the law that was just passed.

According to the New York Times, Goldman Sachs, the big investment banking company, is the chief financial advisor for Governor Davis; it was also one of the chief authors of the bill. Goldman Sachs also just happens to be the chief banker for PG&E, as well as being involved in trading electricity on the wholesale market, owning a company that sells natural gas for electric power generators, and it will most likely be one of the chief marketers of the billions in new bonds that the state of California will soon issue. At the same time, another big investment house, Credit Suisse First Boston, helped advise the Democratic Party speaker of the California House, Robert Hertzberg, while also serving as the banker for many of the big power generating companies.

The new law just passed in California is only the first of a whole series of supposed "reforms" of the California deregulation. In the coming weeks, the legislature will figure out how to justify a state takeover of the 12 billion in debts that PG&E and SCE claim they owe the power generating companies (including to their own generating plants) and supposedly cannot pay.

That is the "free market" in action: the companies are free to profit, while they get the politicians and the government to force us to subsidize them and pay off their expenses and debts.