Energy: The Fleecing of California

Against the Current, No. 91, March/April 2001

Barry Sheppard

THE ROOT OF the electrical power “crisis” in California lies in the 1996 deregulation of the industry by the state government, approved unanimously by both Democrats and Republicans in the state legislature and signed by Republican then-governor Pete Wilson.

The rationale at the time was the “free market” swindle being promoted by capitalist governments around the world. In this fairy tale, ending regulation of electricity would introduce “competition” as hundreds of new power generating companies would spring up, to produce lower prices and better service.

Before deregulation, there were two main utilities in California. In the central and northern part of the state Pacific Gas and Electric (PG&E) produced and distributed power, while Southern California Edison (SCE) serviced the south.

Regulation meant that there were some safeguards on prices, and some assurance that power would not be turned off. Deregulation required PG&E and SCE to sell half of their power plants. They also set up two new companies each, one that owned the power plants, and the other the power lines.

So PG&E Corp. became the owner of half of PG&E’s former plants, and PG&E Co. became the distributor of power in its region. Edison International became the owner of SCE’s former plants, and SCE became the power distributor.

PG&E Corp wholly owns PG&E Co., and International Edison wholly owns SCE. But hundreds of new power-producing companies didn’t spring up to buy the plants the utilities were selling off. Big firms, many in other states, bought most of them.

The utilities wrote the deregulation law that the legislators adopted. One of the things they insisted on was that prices the distributors could charge be fixed at rates well above cost until the year 2002. This meant that the distributors raked in billions of super-profits for four years following deregulation.

These billions were turned over to the parent companies, which used them to pay off debts, including on bad investments on nuclear power. These billions — estimates by consumer groups are that $20 billion were involved — were also used to buy power plants across the nation, some of which also sell to PG&E Co. and SCE.

The parent companies also made billions on the plants they did sell. PG&E Co. and SCE could then buy power from those who bought their former plants as well as from any other power producers.

Secret Price-Rigging

In addition, deregulation set up an electricity wholesale market. That is, the big boys in the electricity production side, including PG&E Corp. and Edison International, meet each day in secret with the distributors.

There they bid on what prices they will charge the distributors for each hour of the next day. And best of all, the highest bid is what all of them get! While some government officials are involved in these meetings, they are sworn to secrecy and face severe penalties if they tell what goes on in these meetings.

So while deregulation was sold to the public as a way to introduce competition, the actual result from the get go was the setting up of a producers’ cartel. Under deregulation there was no creation of a “free market” in electricity production. What happened was a transition from a regulated capitalist monopoly to an unregulated capitalist cartel.

Some of the old plants the utilities sold weren’t as productive as new plants, and they were shut down. The big boys didn’t see any need of building many new plants in the profitable years since deregulation. But they did see an opportunity last summer, when demand for electricity was high, to jack up the price for power they sold the distributors.

I happen to work in a small steam-power plant, which sells electricity to PG&E. This small company, which is wholly owned by United Airlines, isn’t privy to the secret meetings which set the prices, but it sells to PG&E at those prices.

When the big boys are done for the day, they post the next day’s prices on the Internet for smaller producers. So I got to see last summer just how the prices were jacked up.

In the summer of 1999, the wholesale cost of electricity was about $30 per megawatt-hour. Last summer the prices started climbing — $50, $75, $150 and even up to $250.

But did the prices come down when cooler whether arrived? No, they went up. The highest months were December and January of this year, when prices averaged about $300-$700, more than ten times what they were the year before. We even saw some hours’ prices reaching $1000, and I almost had a kitten when I saw prices for each of four hours on one day in January reach $2500.

For most of this period, at least twenty-five percent of the electrical power plants selling to the distributors were not operating at any one time — shut down for “routine maintenance” — quite convenient for keeping prices up!

Since PG&E Co. and SCE were buying electricity at these prices and were locked in to the prices they set in 1996 for what they sold, they couldn’t pass on these costs to their customers. Consequently they went into debt big time — billions.

But we have to keep in mind that this is a bookkeeping sleight of hand, as their parent companies have been raking in the dough like mad selling power to their wholly owned subsidiaries. The parent companies have legally protected their vast assets in the event that PG&E Co. and SCE file for bankruptcy. “We are talking about two different accounts,” PG&E financial officer Kent Harvey told Business Week, in justification.

Selling Panic

The distributors have been on a big scare campaign that they were going bankrupt, and demanded that the government bail them out. To frighten consumers, they staged a few days of “rolling blackouts,” where different areas would have their electricity cut off for one or two hours.

The state government has already thrown hundreds of millions to the distributors, and probably will give them billions in the end. Governor Gray Davis, a Democrat far to the right of typical 1970s Republicans, and the legislature have a problem, though: how to do this without appearing to be stooges of the profit hogs?

Ordinary consumers are skeptical of the whole mess. Polls show that fifty-seven percent of Californians don’t believe there is a real crisis. We have to remember that consumers paid inflated rates for four years after deregulation, to help the PG&E Corp. and Edison International pay off their debts and the nuclear power fiasco, and to buy more plants.

Now PG&E Co. and SCE want the state to pay off their debts to the producers’ cartel, including to PG&E Corp. and Edison International. Besides pressing for a government bailout, the distributors want a rate hike, which will hit working people the hardest. Already Davis has agreed to a nine percent increase, but PG&E and SCE want more.

As the truth about the naked greed and monopolistic manipulation of the market by the producers’ cartel is becoming known, the idea that electricity production and distribution should be a publicly-owned non-profit utility has begun to be advocated, not only by socialist groups and the Green Party, but by some commentators in the daily press.

Such a public utility should be run by an elected public board, with all its decisions and books open to public scrutiny.

While not going that far, the AFL-CIO and mainstream ecological groups are demanding that any government bailout should be compensated with real assets from the distributors, such as the power grids, becoming public property. They are also demanding that working people, the poor and the elderly be protected from rate hikes.

ATC 91, March-April 2001