Gridnapped!: Electric Deregulation's Ransom

Policymakers point their pudgy fingers at greedy power generation companies. Generation companies point their digits at hungry consumers. Consumer groups point at avaricious utilities. Greedy Wall Street investors just point their magic wands and poof! The entire electric system in California collapses.

Greed, indeed, is the underlying cause of California's energy crisis.

It's a lot of other things too, but the comet-struck electric disintegration in the last few weeks are the embers of a decade of money grubbing.

Tracing the electric system's collapse from today backwards, greed plays the major role at every step.

Today, and for the last month, investors represented by Wall Steet were greedy enough to become the supernova that melted down utilities. Investors in utilities, a place that used to be safe to park one's money, started getting nervous as the price of procuring electricity with the wholesale markets' recent price escalation. To protect nervous investors, analysts like Standard & Poors repeatedly downgraded Pacific Gas & Electric and Southern California Edison's securities until they bottomed out at junk bond status last week. Greed in this case was protecting what money was left in their investments by cashing out and keeping new investments from flowing into utilities.

At the same time greed from investors in companies that generate power selling into the wholesale market -- Southern, Dynegy and Reliant is a partial list -- wanted to protect their skyrocketing profits gleaned from those high prices on the wholesale market. As utility securities kept being downgraded, power plant owners pulled the bridge up over the moat and said they were not about to keep sending energy to utilities who may not be able to pay the exorbitant costs they were charging for their power. And so, the power began to trickle off, which sent prices even higher.

Also coincident was the greed of investors in the utilities' parent corporations. About the same time that deregulation began in the mid-1990s, utilities set up a corporate structure that kept them at arms length from a new holding company. That parent company also had other affiliates, or sister, companies aside from the utility. In PG&E's case it is PG&E Corp. In Edison's case it is Edison International. Originally these holding companies were set up to protect utilities' pockets from being raided by bad investments in other parts of the holding company ventures. "All these utilities tried to diversify [in the 1980s and early 1990s] and all had failed," noted former California Public Utilities Commission president Greg Conlon in hindsight. Now, however it works in the other direction.

The greedy parent companies milked utilities for billions over the last few years. In PG&E's case, the utility transferred $9.6 billion to the parent company, according to Walt Campbell, PG&E director of business and financial planning. The parent company is not about to give it back. Two weeks ago federal regulators (Federal Energy Regulatory Commission) approved a plan that reinforces the wall between PG&E the utility and the PG&E Corp. They do have good lawyers.

Regressing on the Way-Back Machine, it was greed by large consumers of energy in the early 1990s that started deregulation. California, then, was in economic doldrums. The defense industry had tanked. California's electric rates were 50 percent higher than the national average. Companies were threatening to move out of state. Big business pleaded for deregulation because it thought business on its own could do a better job of scaring up cheap electricity if businesses were allowed to get away from utilities and buy energy on the wholesale market. And in so doing would add more profits to their bottom line.