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Power to (and From) the People!

As our new president and vice president see it, California‘s power crisis is simply what happens when government meddles with the iron laws of supply and demand. If the lamps are going out all over Eureka, if Silicon Valley is flickering at twilight, it is simply because Californians have been too damned finicky about their air quality to build the power plants they need. Over the past few years, after all, demand has been soaring as the state has recovered from the deep recession of the early ’90s. The solution, obviously, is more supply -- and if that spoils some wildlife reserve or raises the shmutz-quotient of our air, well, that‘s just the price of economic growth.

If we are in a crisis of supply and demand, though, why are the lights still on here in L.A.? After all, no part of the state saw its economy dip so low in the early- and mid-’90s as Los Angeles, where the end of the Cold War fairly halved the size of our then-largest industry, aerospace. And nowhere has demand grown more, as the local economy has turned from bust to boom, than here in Los Angeles. We consume power like nobody‘s business: L.A. today is home to the greatest concentration of manufacturing in the nation, and, come to think of it, we stay up nights a lot later than they do in Turlock. If California is truly experiencing a wave of underproduction and overconsumption, Angelenos should be just now lighting their candles and cursing the darkness.

Instead, we’re still shooting lights across the sky at the premieres of third-rate movies. For what California is confronting is a crisis not of supply and demand, but of deregulation, of free-market mania, of ideology run amok. That the lights are still on in Los Angeles is pretty good evidence that publicly owned power companies such as our own DWP can keep the lines humming, even as deregulated private power companies can plunge a city into darkness if their profit margins are too low.

Consider, for instance, how our other local power company, the investor-owned Southern California Edison, chose to allocate its revenues over the past several years. The state has just completed an audit of this model corporate citizen, and discovered that of the $7 billion that SoCalEd took in over the past five years from the good ratepayers of Orange County and the San Gabriel Valley and the other parts of the L.A. area not serviced by the DWP, it forwarded $4.8 billion to its parent company, Edison International, which paid out $1.6 billion in shareholder dividends and used $2.7 billion to buy back its stock. While the DWP was keeping its rates low and creating cleaner and more efficient generating and transmission facilities, Edison simply “took the money and ran,” as state Senate President John Burton put it.

Worse yet, Edison was taking money out of the community that had been guaranteed it by the terms of the state‘s deregulation package, which fixed the rates that Edison here and PG&E in Northern California could charge their customers. This was not a ratepayer-protection provision, though it has been widely reported as such by innumerable editorialists chastising the state for coddling its consumers. To the contrary, it was designed to keep the utilities’ revenues higher than they otherwise would have been, since wholesale prices were so low. The rate was fixed not to keep it from rising above what consumers could afford, but from falling beneath what the companies wanted. And -- until wholesale prices moved upward last year -- that‘s precisely what it accomplished.

The editorialists thundering that California’s consumers have been unnaturally sheltered from the market, then, have it backward. For four years, consumers paid more so that Edison shareholders could thrive. And now that the crisis has hit, consumers are being asked -- well, to pay more so that Edison shareholders can thrive.

And thrive they will. On Monday, the Legislature began to craft a bill that would have the state issue bonds that would fund its going into business to purchase power from generators, that would fund the utilities‘ repayment of debt, and that would authorize them to raise their rates. And on Monday, not coincidentally, brokerage houses told their clients that it was safe again to buy PG&E and Edison stock.

Indeed, word of the pending bond issues was good news for Wall Street not simply because it meant the investor-owned utilities were viable again. For one thing, Wall Street makes money on bond issues: In 1996, the last bond issue for California’s utilities brought in a cool $46 million in broker fees for investment bankers.

For another, the bill that is currently taking shape does not present the kind of ideological challenge to Wall Street that, for a time, it looked like Sacramento was prepared to mount. For the past month, Gray Davis and the topmost legislative leaders, Assembly Speaker Bob Hertzberg and Senate capo Burton, have all endorsed (Burton avidly, Davis tepidly) the establishment of a state public power authority, with generating and transmission facilities of its own. After all, California is home to 30 such authorities at the municipal level, of which the DWP is just the most conspicuous, all of which had been able to provide uninterrupted power to their consumers, at lower rates than their investor-owned counterparts, during this time of alleged scarcity. Precisely because such companies don‘t have to meet the profit projections of their institutional investors, they’ve been able to keep the lights burning.

 

In recent weeks, an idea much in favor in Sacramento, then, was not simply to establish such a public authority, but to have it take over the hydroelectric facilities or, more promising yet, the power grid of SoCalEd and PG&E, in return for the state‘s paying off the companies’ debt. If taxpayers and ratepayers were once again going to shell out to keep the utilities in business, they should get something tangible in return.

In the past week, however, the governor and Legislature changed that to something in-tangible. They still supported a public power authority, but this new agency would not acquire power lines and power plants as a condition of picking up the utilities‘ debt. Suddenly, the word around Sacramento was “warrants” -- that is, stock options in the utilities that the state would acquire in return for picking up their debt, and that the state could exercise if the utilities’ stock appreciated.

Why warrants? For one thing, Republican legislators were uncomfortable with the state‘s taking real property in return for helping the utilities; that smacked too much of socialism. “Some kind of warrant or option is the more appropriate way to go,” said Jim Brulte, leader of the GOP’s state Senate delegation. Davis -- a leader with all the resolve of J. Alfred (“Do I dare to eat a peach?”) Prufrock -- wanted bipartisan cover for his bailout. He also wanted to please Wall Street, whose disapproval would be a formidable stumbling block to any future Davis presidential bid. By that standard, linking the fortunes of the state to the rising stock price of the utilities was a slam-dunk.

By any other standard, however, it‘s a grotesque idea. The one precedent for the government’s taking stock options in return for bailing out a company is the case of Chrysler back in the ‘70s. But this is an entirely different matter. Chrysler was saved chiefly because it provided too many decent-paying jobs. And when Chrysler stock appreciated, it wasn’t because Lee Iacocca had raised the prices on cars that everybody had to buy.

Under the warrants plan for the utilities, however, the public‘s interest as a ratepayer is diametrically opposed to its interest as a shareholder. If the utilities ask the Public Utilities Commission for a rate hike, or for permission to run their plants more profitably by fouling the air a little more, how does the PUC calculate the public’s interest? If the new public power authority threatens to take business away from Edison and PG&E half a decade from now, how should the PUC respond? Is it in the public‘s interest to promote the Big Two’s profits, or to keep its own rates affordable?

A swap of real assets in return for debt, by contrast, entails no such conflicts. It simply hands those assets to a public sector that in city after city across the state, in regional authorities such as the TVA, and in other states with such authorities (such as New York), has been able to provide reliable, affordable power. Indeed, what‘s striking about the debate we’re now having on how to get out of this fix is that not one opponent of public power has answered why it is that cities and regions and other states can run eminently successful power authorities, but, uniquely, the state of California cannot.

Nor, for their part, have champions of public power sufficiently contested the basic premise of the deregulators: that the distribution of power is best accomplished in the most freewheeling marketplace. The problem with this model is that the buyer is nowhere so free as the seller. A person, an office, a city cannot simply do without electricity for a week if the price is too high, any more than they can do without oxygen. It is the absolute dependence of the buyer that makes this a very unequal exchange -- unless the distribution is regulated, or publicly controlled, or both. Instead, what California established when it deregulated the industry in 1996 was a system that maximized the buyer‘s vulnerability, forcing utilities to buy their power on a daily basis on the spot market.

 

That’s not a crisis of the supply and demand for natural resources. That‘s a crisis of a marketplace that gives all power to the seller.

For the new administration in Washington, however, California’s deregulation debacle provides a marvelous opportunity to remedy an entirely different crisis -- the heart-rending inability of the American oil and gas industry to realize profits that transcend the obscene. To be sure, Enron, Reliance Energy and Duke Energy -- the companies that are peddling power to California now -- are unveiling their best quarterly reports ever. But for the Bush administration -- which, to judge by its mindset and resumes, is really the oil industry vested with state power -- the California crunch creates the opportunity to remake the world in the image of East Texas.

In just the past few days, both Dick Cheney and W. himself have called for drilling in the Arctic National Wildlife Refuge. Cheney has called for establishing power plants just across the border in Baja -- oil maquiladoras, free to churn out power without having to observe those costly environmental safeguards. (Bush has called for reducing our dependence on foreign oil, but, hell, Baja‘s just California without the regs.) Both have said that California needs to have its plants run at full capacity, even if that means weakening the standards set by amendments to the Clean Air Act that Papa Bush signed in 1990. And, lest anyone conclude that the new administration is eco-insensitive, Lawrence Lindsey, Bush’s economic adviser, has opined that higher prices for California ratepayers “would certainly encourage conservation.” In his very first week on the job, W. has shown himself to be the president of, by and for the Houston boardrooms. All the more reason why Californians need a public power authority of their own.


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