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.

The all-Republican California Public Utilities Commission went along with the plan, and thus, greed on behalf of big business begat deregulation.

Even when the economy began turning around in 1995 and businesses no longer threatened to leave, the deregulation virus permeated the formerly staid offices of public utility commissioners. The virus then spread to lawmakers, who also saw it as both inevitable as well as a way to reel in more campaign contributions and good public relations. Lawmakers took over, slamming regulators as inept do-nothings.

What lawmakers ended up assisting was the preservation of utilities' blanket of long-term interest on their investments, no matter how foolish the investment. In so doing, they also made Wall Street more warm and cozy about the prospects of deregulation. California utilities did make a couple of minor sacrifices, but in the end, ratepayers were left on the hook for just as much investment capital and most of the interest to be shoveled to utility shareholders. Those bad investments were paid off last year, but it still wasn't enough for utilities or Wall Street.

As the greed time machine moves still backwards, a decade ago, at the core of the lack of new power plants to supply for current electric demand was, uh, greed.

A few years before the deregulation seed began to sprout, new power plants were supposed to be built. The state opened up electric generation to new developers because utilities had done such a bad job of building economical plants-like huge nuclear facilities. Utilities didn't like being kept away from building new power plants one bit. In particular, Edison's greed to keep all the new generation to itself or have no new power plants built at all was the downfall on the supply side. After being hammered for years by Edison's attorneys, the California Public Utilities Commission gave up and no new plants were built to slake today's energy thirst.

What constitutes the electric industry so it stands to be deregulated in the first place? Deregulation doesn't sound complicated-one day an industry is subject to rules and regulations and the next day it's not.

The electric industry is somewhat akin to the airline industry. The part of the airline industry that was deregulated is the part that takes people and cargo from here to there -- the commodity of travel. But, the government kept a monopoly on the part of the industry that ensures airliners don't bump into each other in the skies -- air traffic control. The business of planning for taking a trip -- the travel agent part of the equation -- was never regulated in the first place. The vital electric industry has three ingredients, all of which have been regulated for over 60 years: generation (the commodity), transmission (similar to air traffic control) and distribution (the travel agents' section, although distribution has always been regulated and will remain so).

The most basic part is the commodity of electricity, the electrons themselves that get sucked up in one's television and refrigerator. The commodity, or generation, side of the industry is the first to be subject to deregulation.

For instance, the utility can sell you the electricity it produces in its own plants or that it buys on the open market, but so can Amway (no kidding). Amway can purchase a certain amount of electricity in a competitive market. Amway might buy high or low. It would take into consideration the use patterns of its customers, the weather and whether there will be any transmission constraints, that is, whether the energy can get to its customers at full volume, or whether transmission facilities in between will be shut down for maintenance or other reasons. Amway then buys electricity from either utilities or private generators. Electricity from both sources is available on the open market.

In turn, those generators try to price their electricity accordingly. Like Amway, if they think power consumption will be high due to a cold snap, or that transmission lines will not be able to handle moving power around the state, then they will ask high prices for that power.

This past year, electricity sellers have learned to get the most out of the market for their power. Playing the capitalist game in a free market for electricity sill is not illegal, despite charges of "gaming" the system. What's basically happened is that generators are waiting until the last minute to put in bids for selling their power. The last minute is when the electric grid operator is desperate and prices are at their highest. Thus, big profits for those who know how to play the game.

Mike Florio, senior attorney at San Francisco-based consumer group The Utility Reform Network, predicts the state will take over what's left of utilities' generation assets like PG&E's huge hydroelectric system. (Unfortunately for taxpayers, it's a drought year.) For the fossil-fueled plants that utilities have already sold off to free-market generators, its going to be difficult and will take years of litigation to institute eminent domain to get them in the state's fold.

Finally, Florio advises continued conservation. "The cheapest kilowatt is the one you never buy." --

J.A. Savage is senior correspondent for the independent weekly California Energy Markets -- Sidebar #1

Then there's nuclear power plants.

Nukes got a new lease on life with deregulation. The nuclear industry is beginning to think it can also build new nuclear plants for the first time in 25 years in the US.

A surprise to nearly all involved in the electric market, nuclear plants are currently about the cheapest source of energy available. As long as potential accidents aren't figured into the equation, nukes are providing electricity at about one-fifth the price of the electric market's going rate this winter. That noted, nuclear is cheap only because consumers have paid off the plants mortgages for utilities-with major interest. For instance, PG&E's ratepayers have forked over upwards of $32 billion for Diablo Canyon-a plant that cost $5.5 billion to build -- according to California Public Utilities Commission analyst Bob Kinosian.

Nukes are not only running flat out when they can, they are the grid's saving grace for the foreseeable future. There is no incentive whatsoever to shut them down despite public fears of radioactive leaks, and there's a move to store high-level waste on site at every plant from Point Beach (Wisconsin) to San Onofre (California).

The feasibility of new nuclear plants, and new owners of existing plants in the states, will be the subject of hearings at the Nuclear Regulatory Commission at the end of the month. Pocket nukes, officially called pebble bed reactor technology, are slated to be first built in South Africa. The technology is small and modular and aimed at settling down to serve areas that are crying for more electricity-kind of like Northern California.

"If everything goes well in South Africa, it would be at least five years down the road" before considering new plants in the US, said Exelon spokesperson Neil McDermott. Exelon is one of the investors in the South African pebble bed plant. He quickly added, though, "None of that is even on the table."

Meanwhile, the Nuclear Regulatory Commission is making it much easier to extend the licensed life of nuclear plants for an extra 20 years. The process, with the apt acronym "GALL" (Generic Aging Lessons Learned), would allow existing nuclear plants to run for extra decades with no local public hearings or other public input. While the nuclear industry is confident that plants won't burst at the seams by running 60 years instead of 30 or 40, critics cite plenty of evidence that it's a bad idea.

"During the early stage of life and the late stage, the failure for both man and machines is generally higher than during middle age; the reliability of both man and machines is generally lower during the early and late stages. The prudent and proper course of action is to retire aging nuclear plants before they reach the point where reliability drops off markedly," notes Dave Lochbaum, Union of Concerned Scientists' nuclear safety engineer.

While nukes are a tough sell, the political reality of providing uninterruptable electricity will likely outweigh any safety concerns. Governor Gray Davis' press secretary, Steve Maviglio, after reviewing Davis' career's worth of statements found nothing, not a word, against nuclear power.

Sidebar #2

Seeds of the Meltdown

The deregulation fiasco began the day Jerry Garcia died. While deadheads in memorial tie-dye wandered the streets with a few bucks in their pockets looking for solace, sensimilla and one last miracle ticket, Pacific Gas & Electric. Southern California Edison, big businesses that live on massive doses of energy, and lawmakers laid the groundwork to get the state's 10 million ratepayers to fork over $28 billion to pay off utility management's and regulators' mistakes. Mike Florio, The Utility Reform Network senior attorney, thought that was a bad idea but at the time had little clue that the $28 billion bailout would pale in comparison with the harm to consumers and the economy that resulted in 2000-2001 in the wake of a free market held captive by the new owners of generation plants that PG&E was forced to sell in the deregulation deal.

California Governor Gray Davis paid no attention to deregulation when he moved into the governor's mansion, but he still took nearly $600,000 from utilities between 1998 and mid-2000. Davis was like a lucky charm in utilities' pockets just in case they ever needed a favor. While Davis has done a remarkable job looking like he's coming to the rescue of current electric meltdown, he's been twiddling his thumbs for months and waiting for the political savior of some other policymaker to take the fall. He also has not stopped taking campaign contributions from utilities.

Not only did Davis not go after utilities, he signed up about $460 million of taxpayer money to bail utilities out. Meanwhile, Davis has focused his energy ire on free-market companies who contributed little or nothing to his coffers. Major electricity generators Dynegy, Calpine and Reliant only scraped up $43,000 for the governor in the last few years.

Most observers think that what Davis does or doesn't do about the electricity crisis will make or break his political career-surely a death sentence to someone so much a creature of politics. Self-preservation aside, Davis' electricity plans will impact the state's economy and everyone's pocketbook. Indeed, California's economy may not be the same after this winter's blackouts and wholesale electric price thunderstorms.

Much speculation about power plant owner saber rattling and utility tantrums has be in the air-basically as methods to see who can get the best deal, or wring the most money out of ratepayers and taxpayers.

"No one wants to be left standing when the music stops," explained Gerald Keenan, lead energy strategy partner for PricewaterhouseCoopers.


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