Open
World Conference of Workers
In Defense of Trade Union Independence & Democratic Rights
Deregulation of the California Electric Industry:
An Unprecedented Travesty
(Speech to Mexico City Trinational Conference by Mark Loy)
[NOTE: Following is the full text of the presentation delivered by Mark Loy to the May 26th plenary session of the Trinational Conference Against Deregulation, Privatization and "Fair Trade," held at the hall of the SUTIN union federation in Mexico City.
Mark was a delegate to the conference from the California State Employees Association, Service Employees International Union, Local 1000. He is also a member of the Bay Area Labor Task Force for Public Power in California. The text below includes 27 endnotes.]
My name is Mark Loy [1] and I am representing the California State Employees Association, Service Employees International Union, Local 1000. I work for the California Public Utilities Commission but I am not representing the views of my employer.
At the outset, you must understand three things:
1. Politicians, large electricity consumers, and corporations created the California Energy Crisis.
2. It will produce one of the largest transfers of wealth in California history from families and businesses to a few private corporations.
3. Unlike the private, investor-owned electric utilities, none of the publicly run, nonprofit utilities are in bankruptcy, causing grid emergencies, or involved in price-gouging their customers.
"Deregulation" or "restructuring" is a corporate capitalist deception and, like the North American Free Trade Agreement and Free Trade Agreement of the Americas, it is a threat to job security:
-- The incumbent utilities cut workforces by approximately 20% between 1991 and 2000. [2]
-- In January of this year, the California Public Utilities Commission prevented Southern California Edison from cutting its workforce by another 13%. [3]
-- Concessions to employers have been the rule rather than the exception during contract negotiations.
The reliability of an essential, non-substitutable public service has been undermined by greed and by the de-integration of the electricity system. [4]
-- Before deregulation, rolling blackouts and emergency alerts were practically unheard of.
-- In December 1998, a series of errors caused an eight (8) hour, total blackout in the major metropolitan city of San Francisco, California, population 801,377. [5]
-- In 1998:
o There were twelve emergency alerts, with
o Operating reserves falling below 5% during five (5) days.
-- In 1999:
o There were five emergency alerts, with
o Operating reserves fell below 5% during one day.
-- In 2000 when the wholesale markets collapsed:
o There were ninety-two (92) emergency notices, with
o Operating reserves falling below
- 5% on thirty-six (36) days and
- 1 _% on one (1) day.
-- So far during 2001:
o There have been one-hundred and sixty-five (165) emergency notices, with
o Operating reserves falling below:
- 5% on sixty-one (61) days and
- 1 _% during thirty-eight (38) days, many involving service curtailment to prevent damage to the grid.
Children, the old, and the sick will be harmed so that the few may profit enormously. Businesses will fail, family budgets will burst, and pay increases and benefits will be lost to pay extortionists.
-- Corporate profits of the members of the wholesale power cartel increased an average of 508% during 2000: [6]
o Reliant + 1,685%.
o Duke + 374%
o Dynegy + 251%
o Mirant + 36%
o Williams + 195%
-- The executives of the private utility holding companies in California received tens of millions of dollars in bonuses, incentive compensation, and long-term incentive compensation in the two years before the wholesale market collapsed. [7]
-- Under the Holding Company [8] structure , the incumbent private utilities channeled billions of dollars to their parent companies, who, in turn, are shielded from any legal and financial obligation to the utility subsidiary [9]:
o Southern California Edison paid $4.8 billion to Edison International. [10]
o Pacific Gas and Electric Company paid $4 billion to PG&E Corporation. [11]
The financial infrastructure for electricity has collapsed and now threatens the State of California's finances. This collapse was created by politicians, large consumers, and utilities who collaborated to write Assembly Bill 1890, the law that instituted deregulation. Great sums of cash were transacted while this bill was being written and during its passage [12]:
-- Investor-Owned Utilities:
o $204,308 in campaign contributions.
o $6,541,620 for lobbying.
-- Large Electricity Consumers:
o $76,439 in campaign contributions.
o $4,413,270 for lobbying.
-- Oil and Natural Gas Companies:
o $106,899 in campaign contributions.
o $9,841,072 for lobbying.
As a carrot to induce consumers to buy into deregulation, Assembly Bill 1890 mandated a transition period with a ten (10) percent cut and a freeze on retail rates. However, during this transition period, when the wholesale power cartel abandoned the long-term contract markets to game the spot market, the incumbent distribution utilities were prohibited from passing through the resultant price gouging onto their retail customers. This freeze on retail rates caused the collapse of the industry's financial markets:
-- Pacific Gas and Electric Company can no longer purchase power because its finances are exhausted. Pacific Gas and Electric Company filed for bankruptcy protection on April 6, 2001. [13]
-- Southern California Edison's finances are also exhausted and it is seeking a bailout from the State of California. [14] Under this plan, the State would assume responsibility for Southern California Edison's shabby transmission system by purchasing it at an inflated price of $2.7 billion or 2.3 times its book value. [15]
-- The marketplace for wholesale transactions - the California Power Exchange or "PX" - ceased operations, then filed for bankruptcy, and has since been dissolved. [16]
-- The State of California has assumed the role of purchaser for all wholesale power for the investor-owned utilities. It has exhausted a $6 billion budget surplus, the cost of its bonds is increasing, its credit has been downgraded, and it may exhaust its ability to issue tax-free bonds. [17]
Regulatory confusion reigns supreme as state agencies stumble through multi-jurisdictional disputes and as the State Governor and the Federal Energy Regulatory Commission squabble over who is responsible for the failure of deregulation in California. [18] This theater of confusion and conflict ensures that the cartel and its political allies will never be held accountable and that they will continue to act with total impunity.
Deregulation will result in the largest transfer of wealth in my lifetime from families and businesses to a few out-of-state corporations:
-- During the transition to "competitive" markets, ratepayers will pay an additional $29 billion for "uneconomic" costs that presumably could not be recovered in prices determined in competitive markets.
-- Ratepayers spent over $5 billion each in the low demand months of December 2000 and January 2001 - ten times the average, monthly bill for 1999! [19]
-- Total revenues for wholesale power increased by an additional $19.7 billion in 2000. [20]
-- Extorted revenues are expected to top $20 billion annually in 2001. [21]
-- By the end of this year the total cost of deregulation will climb to approximately $5,000 to $6,000 per customer. [22]
-- By the end of this year, Californians will have paid $60 to $70 billion more for electricity under deregulation. We will pay at least $10 to $20 billion more annually for the foreseeable future. The market value of the entire generation, transmission, and distribution system is $29 billion. [23]
Now that I have briefly explained what deregulation has done to California, let me explain what this "restructuring of the electricity industry" is. Deregulation or restructuring was intended to bring competitive market solutions to the problem of high electric rates in California. California's average per kilowatt system rate was fifty (50) percent above the national average and this was a cause of great concern to corporate leaders and anti-government ideologues.
With the "success" of the Reagan administration in conquering the Soviets and subduing big government, corporate leaders and politicians in California decided that "competitive markets" would be the solution to this problem of high rates. So they rushed to restructure the industry by replacing regulated monopoly franchises with unregulated markets. Everyone -- consumer advocates, unions, and environmentalists -- was duped by the propaganda that proclaimed competitive markets would eliminate regulatory inefficiencies and lower rates by 20%.
In practice, restructuring has meant the de-integration of the vertically integrated electricity system. So, in California, the modern system has been broken into many pieces in the hope that new markets would spring up, expanding customer choice and creating competition. What is really happening is all economies of scope and scale are being destroyed. This aspect of restructuring is called "divestiture" and "unbundling".
So, for example, rather than having one company controlling the grid and coordinating generation, transmission, and distribution to ensure reliable, inexpensive service, we have many deregulated companies, sometimes providing the same service, playing the spot market and maximizing profits by disrupting supply. It is most noteworthy that the diseconomies of the distribution system have been preserved so that retail customers remain captive to the cartel. When you destroy economies of scope and scale and replace rules and regulations with the "discipline of the market", all you get is confusion, more volatility and risk, higher prices for less service, and cartels extorting captive customers.
In order to maximize the profit incentive, restructuring called for the elimination of the generators' obligation to serve customers. This new condition provided the optimal environment for gaming the system. In particular, this allowed generation plants to take their orders from out-of-state marketers based on market price rather than from local operators to meet load. This is a key development because even if generation plants are built, there is no obligation to provide any electricity except when and where the highest prices are paid.
Under these conditions, the market incentive is to drive up the price by creating shortages in generation and transmission capacity. During the 1990s, regulators and utilities collaborated to undermine resource planning of additional capacity by postulating that either sufficient capacity already existed or that the impending arrival of "competitive markets" and the attendant profit incentive would "as if by an invisible hand" naturally solve any future capacity problems. [24]
Now that markets have replaced regulation, the most commonly used tactics for creating "shortages" are called "daisy-chaining" and "ramping". Daisy-chaining is a gaming practice in which suppliers sell power to middlemen, who sell it over and over to drive up the price and to make the capacity appear committed, until a certain market price is achieved, at which time the actual sale to the end-use consumers is made. Ramping is the practice of using unscheduled "maintenance" and irresponsible operating tactics to curtail supply until a certain price is achieved. All this means that, when there is adequate capacity, "shortages" can be engineered to permit price gouging. These conditions and tactics are all means for maximizing profits without limits and with total impunity.
The second ingredient in this travesty is replacing a fixed return with unbridled profits. The free marketeers are trying to make greed a virtue. An essential service for which there is no readily available substitutes at low cost is extremely vulnerable to price gouging because the consumer has no real choice, no alternative. In fact, in the absence of regulation, the cartel has no choice either because they must collude to survive. If there were competition, then rate wars, price discrimination, political corruption, and bankruptcies would necessarily follow, a repeat of the l880s through the early 1900s in the United States. Competition is too risky a venture in such capital-intensive industries, with high fixed costs. [25]
Ultimately, competitive market approaches may be unworkable because it is exceedingly difficult to match long-term power contracts of varying durations and having unpredictable physical impacts on the grid with the need of the grid operator to instantaneously and continuously balance the overall supply and demand for electricity under conditions of imperfect information. [26]
Deregulation has replaced coordination at a fixed profit with price gouging cloaked in chaos masquerading as a "free market solution". California has cartels controlling fossil fuel markets and power supply. The law of supply and demand is working: The cartels control the supply so they can demand whatever price they want. Furthermore, you can be sure that the cartels will work with the financial institutions and legal community to protect corporate profits against oversupply. [27] This will be the situation until the cartels are broken by a deep recession, or re-regulation, or public power.
In closing, it is most significant that nonprofit, democratically run utilities are the overwhelming success story in California's deregulation travesty. This is attributable to the fact that they decided not to restructure and, instead, chose to isolate their customers from the deregulated markets. Their rates were 22% lower than the investor-owned utilities before deregulation and this differential will grow as the government-sponsored bailouts progress.
None of the nonprofit, public utilities are filing for bankruptcy nor have they exhausted their finances. These nonprofits are suffering from blackouts, not because of their own mismanagement, but due to the state's inability to acquire power. The lesson in California is that electricity is an essential service that, for the public good, should be provided by nonprofit, democratically run agencies. For example, the Sacramento Municipal Utility District is managed by seven, democratically-elected Directors.
If a critical issue arises, then this Board of Directors conducts extensive public forums throughout the district in which they inform their customer-owners and solicit public input. The employees live and work in the district and their families interact with the customers in their communities. Accountability is unavoidable and responsiveness to customers is natural. The community has control over its energy future and designs the type of system and programs that best suit its priorities and needs. For example, The Sacramento Municipal Utility District and the Los Angeles Department of Water and Power have the most successful and extensive solar and alternative energy programs in California.
Such accomplishments cannot be underestimated, the customer-owners of the Sacramento Municipal Utility District voted to decommission a nuclear power plant. This is the only place on earth where a community, including unionized labor, successfully shut down a nuclear power plant! Just as war is too important to be left to the generals, energy is too important to be left to the cartels.
*****
Endnotes:
(1) Mark R. Loy is an analyst for the Office of Ratepayer Advocates of the C.P.U.C. and was elected Vice President/Chief Steward of District Labor Council 745, Civil Service Division of the C.S.E.A. CSEA adopted a Resolution condemning deregulation and the bailouts and workforce cuts and advocating public takeover of the entire industry.
(2) The reductions are between 23 to 31 percent including the effects of partial divestiture of their generation plants. Divestiture means that workforce management was transferred to new employer, e.g., Reliant.
(3) California Public Utilities Commission, Decision 0103029.
(4) The following data was taken from the California Independent System Operator's Event Log 05/15/01. For the San Francisco Blackout see the California ISO's Final Report: December 8, 1998 San Francisco System Disturbance.
(5) As of January 1, 2000. Source: City and County of San Francisco.
(6) Energy Consumer Update, Senator John Burton, President Pro Tempore, Third District, California Legislature.
(7) See each corporation's DEF 14A Proxy for 2000 filed with the Securities Exchange Commission.
(8) A holding company is a corporation that owns sufficient stock in other companies to have control over their operations. For example, PG&E Corporation is the controlling parent of Pacific Gas and Electric Company, PG&E National Energy Group, and Pacific Venture Capital. In the case of the energy holding companies, the parent company controls unregulated subsidiaries that operate generation plants and/or have natural gas operations outside California as well as the regulated utility.
(9) California Public Utilities Commission Investigation 01-04-002, see "ring fencing".
(10) See Edison International's 10-K filings with the Securities Exchange Commission, 1996-2000. Edison International is the parent company of a Holding Company that includes Southern California Edison, the electric utility subsidiary.
(11) See PG&E Corporation's 10-K filings with the Securities Exchange Commission, 1996-2000. PG&E Corporation is the parent company of a Holding Company that includes Pacific Gas and Electric Company, the electric and gas utility subsidiary.
(12) Appendix E, "Comparative Power Analysis of the California Electric Utility Industry Deregulation Process", Mark Stout, Masters Thesis, University of California at Berkeley.
(13) April 6, 2001. See
http://www.pgecorp.com/news/index.html
(14) April 9, 2201. See http://www.edison.com/media/indiv_pr.asp?id=2500
(15) "Davis Reaches Deal with Edison to Buy Transmission Lines for $2.7 Billion", Contra Costa Times, February 24, 2001, by Andrew LaMar and Mike Taugher.
(16) The PX filed for bankruptcy on March 6, 2001 and the Federal Energy Regulatory Commission dissolved the PX effective April 30, 2001.
(17) "Bond Expert Calls State Power Crisis An Opportunity", San Jose Mercury News, May 15, 2001,
mschwanhausser@sjmercur
. "State Controller Kathleen Connell Says Energy Rate Hike Doesn't Add Up to a Solution", News Release, Controller of the State of California, May 22, 2001.
(18) California Power Exchange Corp. vs. FERC, No. 10-70031 (9th Cir. 2001).
(19) California Independent System Operator, Market Analysis Report, February 16, 2001.
(20) Energy Consumer Update, Senator John Burton, President Pro Tempore, Third District, California Legislature, source the California Independent System Operator.
World Bank, Energy and Mining Sector Board: The California Power Crisis: Lessons for Developing Country Power Markets, pg. 5, sets the excess revenues at $10.9 billion.
(21) "State Controller Kathleen Connell Says Energy Rate Hike Doesn't Add Up to a Solution", News Release, Controller of the State of California, May 22, 2001.
(22) Number of customers approximately 12 million. Source: California Public Utilities Commission, EREG4, Electric Restructuring Education Program, May 30, 1997.
(23) The sum of the actual Auction Selling Price of each divested plant (source: California Energy Commission) plus the State Board of Equalization's Assessed Market Value adopted for 2000 of the three incumbent private utilities.
(24) FERC 61,215, Docket No. EL95-16-000.
(25) "Price Discrimination, Electronic Redlining, and Price Fixing in Deregulated Electric Power", by Eugene Coyle, American Public Power Association, January 2000.
(26) World Bank, Energy and Mining Sector Board, The California Power Crisis: Lessons for Developing Country Power Markets, pg. 11.
(27) California Public Utilities Commission/ Office of Ratepayer Advocates Lecture Series, April 30, 2001. Shell spokesperson, John Frazer, said that he knows the kind of people who run the wholesale power cartel. He explained that the generation companies will never build surplus generation capacity because they will take their old fossil plants out-of-service when new ones are built. Their goal is not to have cheap and plentiful energy for California, but to maximize their own profits. They are so influential in financial circles that no one outside the cartel will be able to get the billions in financing it takes to compete. If regulation is attempted, they will use untraceable "daisy chain" deals to shift the profit to any unregulated link in the system.
Also, see the following websites for additional information on public power and deregulation:
www.ilumina.org.br
Books:
Who Owns the Sun? People, Politics, and the Struggle for a Solar Economy, Daniel M. Berman and John T. O'Connor (Chelsea Green Publishing Company, 1996).
Power Struggle: The Hundred-Year War Over Electricity, ed. Richard Rudolph and Scott Ridley (New York, Harper and Row, 1986). Out of Print.
Articles:
"Transforming Power: Lessons from British Electricity Restructuring", John E. Kwoka Jr., Regulation.
www.cato.org/ubs/regulation/reg20n3e.html