As spiraling oil and natural-gas prices pushed the cost of producing electricity higher this fall, California’s behemoth private power companies (Southern California Edison, Pacific Gas & Electric) threatened blackouts and began murmuring about imminent bankruptcy. With such guns at its head, the state‘s Public Utilities Commission took the first steps December 21 toward junking the rate freeze that had protected consumers since the deregulation deal enacted by the Legislature in 1996, which had been touted as likely to reduce energy costs.
The PUC, while not quite abandoning the 4-year-old cap, fast-tracked hearings that could do so in early January, after a cursory audit of the power companies’ books. Unlike the vast majority of Californians, Angelenos who get their juice from the DWP (and residents of other areas such as Riverside that buy from public power) will not be subject to the hikes.
Consumer activist Harvey Rosenfield, whose Foundation for Taxpayer and Consumer Rights (FTCR) has fought car-insurance and HMO abuses as well as utility issues, gave the Weekly‘s John Seeley his view of how this crisis came about and how public officials — and consumers — should respond.
L.A. WEEKLY: When deregulation was enacted, what were people thinking?
HARVEY ROSENFIELD: The utilities [Edison, San Diego Gas & Electric, PG&E], big industrial energy users and Wall Street were thinking of a financial bonanza. The politicians were reaping a campaign-contribution bonanza from those sectors; Pete Wilson was thinking about running for president and figured that by pioneering deregulation in California, he’d made hundreds of rich new friends in utility and energy companies in other states.
Where was the California consumer movement when all this went through?
At the time, we were focused on Proposition 216, our HMO-reform initiative on the November 1996 ballot. Unfortunately, we didn‘t have enough resources to monitor the deregulation legislation. Other groups — San Diego’s UCAN, for example — tacitly signed off at the talks. A Bay Area organization, the Utility Reform Network, did too, but it later disavowed its action and sponsored Proposition 9, the 1998 initiative to undo the bailout.
The system that was established is clearly vulnerable to bottlenecks, since distribution companies supposedly go into the market every day to buy their daily power allotment. Was this problem discussed when the bill was passed? What safeguards were built in? Or why were safeguards not thought necessary?
All the players bought into the free-market ideology; no one thought that the market might not exist, or that a cartel could easily control it. In fact, the law was rigged so that before deregulation kicked in, ratepayers were forced to pay off the utilities‘ uneconomic investments. So the system was designed to give them a ”competitive“ edge.
What discussion was there at the time about how greatly the municipally owned model, with companies generating their own power, differed from this new model? The two systems are so fundamentally different that the premises behind one of them must be wrong. Was this discussed?
There was never a moment’s contemplation of moving toward a public-power-based system, like L.A.‘s DWP. The entire thrust was in the opposite direction: privatization of a system that ratepayers had built and government had controlled for decades. In fact, the deregulation law contains a provision intended to let the private utilities force local governments to sell off their municipal plants (to the private utilities), deregulating those systems too. Obviously, given the current debacle, that’s not going to happen.
Where did this plan come from? Did right-wing think tanks push it? Did the power-generating industry, distinct from the utilities, push it? Oil and gas companies? What was the role of Southern California Edison and PG&E?
It began as part of the deregulation mantra promoted by the corporate-funded think tanks. Reagan-era federal bureaucrats began pushing deregulation of electricity in the ‘80s. The Clinton administration continued the process. Big industrial users wanted deregulation so they could avoid the California utility companies, whose poor investments, especially in nuclear power, had pushed rates 50 percent above the national average. The big users figured under deregulation, they could contract with cheaper plants.
Is public power the ultimate answer?
It’s just textbook economics that energy companies operating as a cartel will never build new power plants. To do so would alleviate the shortages they are prospering from. Electricity is too essential to California‘s infrastructure to leave it in the hands of unscrupulous companies whose only objective is to maximize profits. The state must resume the responsibility for ensuring that our electricity is provided in a reliable, affordable and environmentally safe manner. Indeed, California should move to a nonprofit public power system. Today, municipal utilities like L.A.’s often-maligned DWP are meeting their customers‘ needs at two-thirds the price currently charged elsewhere in the state. And their customers aren’t being ordered to turn off their holiday lights, nor threatened with blackouts.
In the meantime, will FTCR be playing a role in lobbying to keep rate hikes to a minimum?
Unfortunately, the dialogue in Sacramento is revolving around how much ratepayers will pay rather than how to protect Californians from any rate hikes. In 1996, the Legislature handed the utilities the largest bailout in state history as a result of private negotiations that did not bring to light the real dangers and costs of deregulation. Now that deregulation has blown up in our face, the utilities want to fashion another bailout through private negotiations in which they hand out meaningless concessions to some groups in exchange for massive rate hikes for all. We will not participate in such a giveaway.
But can‘t the companies make a case that there’s no alternative?
The recent posturing by the utilities and Wall Street is meant to give the public that impression — but actually demonstrates that they are ”crying wolf“: Edison, after threatening to declare bankruptcy without a cash infusion from an immediate rate hike last Friday, has not filed for bankruptcy. Standard & Poor‘s, the Wall Street firm that last Wednesday promised the utilities’ credit rating would be slashed to junk-bond status without a rate increase within 48 hours, did not downgrade the companies. There is no wolf at the door.
California called the bluff of Edison and PG&E by ordering audits of their corporate finances. An independent and thorough review of Edison International and PG&E, however, cannot be completed in the week [between Christmas and New Year‘s] allotted. Auditing two $30 billion corporations in six days is ridiculous.
So you see ways the crisis could be solved without increasing rates for residential consumers. How?
Governor Davis should immediately bring online all power plants that are unnecessarily offline to ensure the reliability of the electricity system. The governor, Legislature and PUC should implement a short-term plan that requires the utilities to sell all the electricity that they generate to residential consumers on a cost-of-service basis, which would require no rate increases. Public officials should develop long-term plans to implement a public power system for California that will protect ratepayers from the economic nightmare deregulation has created.
What can be done if the governor and Legislature instead buy into bailing out the utilities once again?
Undo the unwarranted rate increases and order refunds through a ballot measure. Since we are a publicly supported nonprofit, we’ll need the power of the public to win that campaign.