The Last Energy War

The $220-billion-a-year US electric power industry is the world's largest in terms of invested capital. It is also in the midst of a revolution in restructuring that is rampaging through the states, with unparalleled economic and ecological impact. Bills are taking shape for the 105th Congress. But in California and Massachusetts, the new energy war is poised to go straight to the ballot. In Pennsylvania, Illinois and a dozen other state legislatures, consumer and environmental interests have been routed by utility lobbyists. But green campaigners have fought back, reclaiming billions of dollars in corporate welfare. In New Hampshire, attempts to force the public to pay for the infamous failed Seabrook nuclear reactor are being litigated. Indeed, the whole grassroots upheaval is headed to the US Supreme Court. But meanwhile, the bitter combat over who will control and pay for our electric power is writing a new bottom line on the US economy -- and on the sustainability of our planet.In many ways the deregulation fight erupted over a decade ago at Diablo Canyon's two bitterly contested coastal reactors, owned by California's Pacific Gas & Electric. Through their 1985 opening, some 10,000 people were arrested here, more than at any other American reactor site. Diablo Canyon sits just 3.5 miles from a major earthquake fault. But its billions in sunk costs are now being leveraged by PG&E to crack New England's electric markets. Sunk capital in two more reactors at San Onofre (also near earthquake faults) is being used by Southern California Edison to jump into East Asia. The doors were flung open by AB1890, the sweeping deregulation bill passed unanimously by the California legislature and signed by Gov. Pete Wilson in 1996.Embraced as a national trendsetter by the utility industry and the Natural Resources Defence Council, it has since been bitterly denounced by virtually the entire California green/consumer community (except NRDC). Some legislators who voted for it have become vehement opponents. More than 700,000 signatures have been submitted to repeal key parts of the bill, more than enough to qualify for a fall referendum. But the California utilities that stand to gain some $28.5 billion from deregulation have sued to keep the referendum off the ballot, and say they'll spend as much as it takes to defeat it if it survives.As the opening salvo in America's deregulation struggle, AB1890 has helped make this much clear: - Deregulation is bitterly opposed by much of organized labor, especially the electrical unions, who brand it a thinly veiled move to de-unionize the utility industry. Any savings in electric bills, they say, will be paid for by lowered wages and worsened working conditions, degraded service and increased unreliability; - Utilities and unregulated producers may now profit from selling ever-larger quantities of electricity, diluting the conservation ethic, and possibly stranding "marginal" customers they were previously required to service. - Much of the environmental community originally saw deregulation as a way to shut the US reactor fleet, which cannot compete, but now brand AB1890 as a scam to prop up dying nukes like Diablo while killing advances in renewables, conservation and pollution control;- Consumer groups, some of which originally saw competition as a route to lower rates, now warn that AB1890 will drive prices down for big industrial users but up for renters and homeowners and small businesses. - Nationally, deregulation is spawning a merger frenzy leading toward a market Rep. Dennis Kucinich (D-OH) has described as a "Jurassic Park run by a few T-Rex utility giants, in which the consumer and the environment are the inevitable prey."- State legislatures are handing utilities a "stranded cost" bonanza for more than $135 billion in bad reactor investments, plus billions more in obsolete coal and oil burners; in California and Massachusetts, the bailout may eat 40 percent of consumers' electric bills.- The natural gas industry is pushing the whole process, expecting to sell virtually infinite quantities of its new "fuel of choice" deep into the next century, despite methane's potential as perhaps the worst greenhouse gas of all. But first it will face a salvo of bills coming in the wake of AB1890 -- not least of which will be a consumer-oriented one from Dennis Kucinich and US Senator Paul Wellstone (D-MN). It will also have to obliterate a half-century of regulatory history."Regulating utilities wasn't always such a dumb idea," says the anti-regulatory FORTUNE Magazine. "The industry was a mess."In FORTUNE's eyes, that meant an electric delivery system half of which was controlled by just three holding companies, with the next 25 percent controlled by just another 13. The collapse of 1929 ruined many of the players, and accelerated monopoly control. By 1935 FDR stepped in to bust up the biggest multistate holding companies and limit the business to regulated utilities with compact, contiguous service areas. Power prices in 1932 peaked at the 1992 equivalent of 32 cents/kilowatt hour. With regulation (and technological advances) they declined steadily until the 1970s.But along the way, the industry exploded beyond effective public control. Only in those areas with small and medium-sized public power districts and cooperatives was there a semblance of democracy. The big federal power purveyors such as the Tennessee Valley Authority and Bonneville Power Authority became empires unto themselves.As did the privately-owned utilities such as Cleveland Electric Illuminating, Com Ed of Chicago, Con Ed of New York, PG&E and other monster corporations that took charge of state and local governments as surely as they controlled the regulatory agencies meant to limit their power. In exchange for their monopoly status, the utilities were required to supply all demanded electricity within their service area. They were guaranteed a profit (often about 15 percent) based not on how well they served the public, or on how much electricity they sold -- but on how much capital they had invested in their physical plant.Even today, a regulated utility can bulge its bottom line by redecorating its offices -- the more it spends, the more gross profit it can make. In the 1970s, shouting "too cheap to meter," US utilities became Frankenstein construction firms, contracting for a peak of 236 reactors, with a total of 1000 ultimately promised by President Richard Nixon.As long as pliant rate commissions let them into the rate base, the utilities and their engineering partners racked up billions in atomic overruns. Diablo, New Hampshire's Seabrook, Tennessee's Watts Bar, CEI's Perry soared beyond original estimates by factors of 600 percent and more. Long Island's Shoreham cost $6 billion, and never opened at all. Finally, the rising conservation and anti-nuclear movements helped stabilize electric demand and force the cancellation of all US reactor orders placed after 1973. But the fleet of licensed US nukes (now down to 107 from a peak of 115) embodies capital inefficiencies of at least $135 billion (according to financial analysts such as Moody's), far more when costs of decommissioning and waste management are added in. Beyond that, obsolete coal, oil and other generators have bound up billions more in dubious assets.Thus the end-of-the century deregulatory fervor that's swept the telephone, trucking, airline and other industries faces a unique electric utility legacy -- an enormous lump of uncompetitive hardware, worth in sum perhaps a half-trillion dollars, much of which would quickly go to scrap in an open market.What would put it there is primarily natural gas. While coal and oil have had their ups and downs, the technology for turning methane to electricity has exploded. With a massive national pipeline network in place, gas-fired turbines of virtually all sizes can be quickly and cheaply installed almost anywhere in the US. Methane co-generators can heat and light individual apartment buildings, small businesses and hospitals, taking them off-line altogether. They can also be built relatively quickly in the grid-sized 1000-megawatt range, producing juice at a quarter the cost of a nuke. half that of some coal and oil. Pushing this "amphetamine of the power business" is a Houston-based megalith called Enron, which monopolizes much of the US natural gas pipeline network. Advertising on the Superbowl and commanding an army of lobbyists, Enron's President Kenneth Lay has been a prime force behind deregulation. Enron has also bought Zond, the biggest US producer of wind machines, plus substantial interests in solar power. The gas industry says that with a deregulated market, prices could drop 30 percent or more within five to ten years. But Dan Berman, co-author of WHO OWNS THE SUN, warns that natural gas supplies are limited and subject to inevitable price increases, with the largest reserves overseas, primarily in Russia, Turkey and the Middle East. Methane is also a global warming agent 16 times more powerful than carbon dioxide. While avoiding particulate emissions from coal and oil, tens of thousands of miles of pipelines could leak enough gas to accelerate a climate catastrophe. And then there's the question of what will happen to the people who run all those coal, oil and nuclear plants -- and who will pay for them as they shut. With more than 30 million consumers, California's deregulation bill is setting the framework for the national debate. "It's not a pretty picture," says Wenonah Hauter, Director of Ralph Nader's Critical Mass Energy Project. "What California has defined as deregulation means that the big utilities will get the public to pay for their nuclear plants, and then establish a network of non-union, unregulated monopolies." What galls California consumer groups most is AB1890's $28.5 billion "stranded cost" bailout, much of which is for Diablo Canyon and San Onofre. "The manufacturers cut a backroom deal granting themselves preferential rates and giving the utilities a massive nuclear bailout, plus all sorts of corporate welfare before the public had the slightest idea of what was going on," says Dan Berman. The utilities get their stranded costs from consumers through "transition fees" and other surcharges levied as the price for choosing other power suppliers. The money EXCEEDS some estimates of the amortized value of the plants, thus providing operating funds that prolong the life of the reactors. "The utilities are being compensated for fossil and nuclear plants that are non-competitive," says Berman. "But the bailout could keep them operating -- dangerously -- long after they would normally shut." To sweeten AB1890, California utilities promise 10 percent cuts in electric prices for small users. But Bay Area consumer activist Eugene Coyle says angrily that many long-term supply contracts were about to expire anyway, yielding a 15 percent price drop. The standard set by the legislature freezes rates for five years prices 50 percent above the national average. Further, the 10 percent discount from that level is actually a complex bonding scheme, for which consumers are liable. Harvey Rosenfield, a Nader organizer spearheading Californians against Utility Taxes (CUT), says in the long run, the "bailout bonds" mean "ratepayers will pay $9 for every $1 in rate reduction they get." They'll also pay with their privacy. AB1890 deregulates the billing process, meaning unregulated contract bill collectors can use information about customers without restriction. "This is a stunning invasion of privacy," says Nader. "Nothing controls the mining and harvesting of consumers' personal records and data." The package contains no funding for consumer advocacy groups. But it does mandate a staggering $87 million for advertising, exceeding by $10 million the national advertising budget for the US Army. That PR plum went unbid to DDB Needham, an agency with strong links to Gov. Wilson. AB1890's backers may need every cent of it. Rosenfield has joined with Herb Gunther of the San Francisco-based Public Media Center in a broad coalition whose 700,000 signatures stand as a monument to public hostility. "Californians will not stand for this kind of rip-off," says Gunther. "This is a campaign we can win." It's also a campaign that's divided the green community. AB1890 does provide for some money for conservation and energy efficiency efforts, as well as subsidies for the renewable energy industry. Ralph Cavanagh of the NRDC and other supporters hail these provisions as a major breakthrough. But Coyle says the funding represents "a sharp drop from what was already mandated by the PUC." Berman adds that "the spread of renewables would come more quickly, even if unsubsidized, in a truly competitive energy market." Nettie Hoge of The Utility Reform Network, a leading statewide consumer group which remained mostly neutral on AB1890, has joined CUT in opposition. "I made a mistake in not opposing it," she says. "Clearly, in retrospect, residential ratepayers did not get enough out of the bill to justify its passage." On the other hand, the NRDC's Cavanagh has come to Washington to promote AB1890 as a national model. "What we got is far better than what the PUC and legislature would have done had we not intervened," he says "You have to look at the solar and efficiency package. The nukes will be shutting down within a few years anyway. And you have to remember that the legislature voted unanimously for this. A lot of good people backed it." Cavanagh says the utilities will get their stranded costs anyway "through the courts or through bankruptcy," and that the reactors will shut no matter what. "What Californians understand is that the nuclear issue is dead. The idea that someone is going to build another nuclear power plant here is preposterous." Cavanagh could be right about that much. Westinghouse has left the reactor business, and General Electric's efforts have met limited success, especially since China now says it will buy no US reactors at least until the next century. There are no nukes under construction here, and in 1996-7 six shut for various economic and technical reasons. Many more are on the brink. But the real bone of contention is those nukes still operating. "With more and more pressure to turn profits, safety and maintenance procedures are going down the tubes," warns Paul Gunter of the Washington-based Nuclear Information & Resource Service. "To compete with natural gas and the like reactor operators are slashing staffs, cutting safety corners, speeding up refueling, doing all sorts of really wild stuff. Unless the Nuclear Regulatory Commission jumps in with both feet, and soon, the chances of a major disaster are really going to soar. In many ways, they already have." Such dangers at Diablo and San Onofre worry California activists, particularly since San Onofre is owned by Southern California Edison, whose president is John Bryson, a founder of NRDC, and a close friend of Ralph Cavanagh. "NRDC did the bidding of SoCalEd and the Energy Foundation and the other big interests, including the nuclear power industry," says Dan Berman. "They sold out the consumers and the environment, pure and simple. AB1890, if applied nationally, will delay renewables for decades." With California as a model, the pro-utility tide in the states has thus far been overwhelming. "AB1890 was a mugging," says Charlie Higley, who leads the Critical Mass Deregulation Project. "Then Pennsylvania was a mugging. Massachusetts was a mugging. The industry just owns too many state legislatures." In New Hampshire, an attempt to limit the amount of costs recoverable for the bitterly contested Seabrook reactor has sparked litigation. Citing a 1930s precedent from the US Supreme Court, which stated the utilities had no right to make consumers pay for bad investments, the New Hampshire Supreme Court sided with the state and PUC to limit the Seabrook bailout. But the reactor's owner has appealed. Meanwhile, Congress is plunging into an increasingly convoluted debate. US Rep. Dan Shaefer (R-CO) stumped the US last year promoting a bill designed generally to serve the interests of big users. It leaves the stranded cost issue to the states, but does include a "Renewables Portfolio Standard" mandating small percentages of solar and wind power into the national mix. (The biggest employer in Shaefer's Denver-area district is the National Renewable Energy Laboratory). US Rep. Tom DeLay (R-TX) last year proposed what some call "the Enron Bill" banning stranded costs altogether, a position shared by the right-wing "free market" Heritage Foundation. The Houston-based gas giant bitterly opposed stranded costs as a barrier to competition in California. But then it bought Oregon's Portland Gas & Electric, which wants a bailout for its failed Trojan reactor. Says Eugene Coyle: "Suddenly Enron's attack on stranded costs has been muted." Ironically, Enron now also complains that forcing California consumers to pay stranded costs for the state's four nukes make it impossible for gas to compete. Publicly, they have all but abandoned a state whose deregulation bill they originally pushed. Privately, commentators wonder if Enron will have the courage to support a referendum banning stranded costs that would again open the California market for them. The electrical unions generally oppose deregulation, which they charge is a thinly disguised scheme to de-unionize the utility industry. But they tend to support stranded costs as a way to fund those unionized nukes and fossil burners. Enron continues to promote its investments in renewables, but Heritage and the rest of the gas industry have been fiercely critical, arguing that wind is uneconomical and, somehow, "anti-green." While the utilities won a huge bailout in Illinois, bitter lawsuits and public attack have shaken Pennsylvania's state public utilities commission. Nuke-laden Minnesota and Vermont have backed off deregulation. A fierce battle is raging in Ohio, where no bill has yet been passed.In Massachusetts, an anti-stranded costs referendum has qualified for the ballot but has been challenged in court. Meanwhile, Massachusetts activists have forced into its largely pro-utility bill a provision making it relatively easy for towns and cities to aggregate demand in something resembling urban and rural coops. Since the New Deal, the idea of public power has posed the ultimate threat to the private utility giants. Those municipalities that fought through the mountains of legal red tape to win their own utilities have enjoyed far cheaper rates and better service. In 1989 Sacramento's Municipal Utility District became the first to vote shut a reactor and replace it largely with solar, wind and increased efficiency, a transition that has brought cheaper rates and world-wide attention.In nearby Davis, Dan Berman says "we want a muni to return control of our power to the community. The barriers are formidable. But if we can pull public power out of the deregulatory mess, it can change the whole long-term ballgame."Harvey Wasserman is senior advisor to Greenpeace USA.

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