My Turn: California's power company claims don't hold up

Posted: Sunday, February 11, 2001

Recently there have been several articles in the Empire on the burgeoning "energy crisis" in California. While they have covered different aspects of the situation, all featured some power company "spin," such as the claim that the 1996 deregulation "forced" the companies to divest themselves of their power plants and capped their rates so that they couldn't recover the cost of their electricity purchases. They have also featured without rebuttal the power companies' claim that they stand to lose $12.7 billion unless they obtain relief.

The only problem with this scenario is that the legislation that deregulated the utilities was mostly written by themselves. According to researchers Wenonah Hauter and Tyson Slocum, "The legislation, written and supported by utilities, privatized their profit and socialized their risks." With the enormous clout of a $300 billion industry, the utilities rammed the complex bill, which few had even read, through the legislature, obtaining unanimous passage.

The "cap" was not artificially low, as the stories claim, but artificially high: Some 50 percent above the national average for wholesale electricity at the time. Thus, what has been portrayed by the companies and the media as a ceiling was actually a floor, intended to keep rates sufficiently high to gratify the desires of the company management.

The legislation included a $20 billion bailout intended to spare the utilities the effects of their economically unsound decisions to invest in nuclear power in the '70s and '80s. Essentially, the mortgage costs of the nukes, prettied up with the term "stranded costs," were to fall on the rate payers who had for the most part opposed their construction, rather than the investors who had made large profits from it before nuclear power turned sour.

In addition to the bailout, an 11.75 percent profit margin was factored in. The total amount of the bailout was projected to be $28 billion. As an example of the "wise use" to which this windfall was put, Southern California Edison funneled $4.8 billion of the $7 billion given it by the rate payers to its parent company, which used $1.6 billion to reward its shareholders and $2.7 billion to buy back its stock. Other purchases by the cartel included power plants in other parts of the country as well as other countries, investments in the telecommunications industry, and other types of high-growth services pleasing to Wall Street.

The companies were not "forced" to sell off their generating equipment; rather, in the legislation they crafted, they gave themselves monetary incentives to sell their power plants, built with public monies, to unregulated private companies (mostly out of state) for more than their book value. A Power Exchange was set up to auction off the power produced by the plants. Often, the electricity changes hands several times on paper before delivery, with a profit taken at each transaction.

The $12 billion figure commonly used for the losses supposedly suffered by the California utilities is equally bogus. Since they retained a number of power plants (nuclear and hydroelectric), they have been selling the power generated by those plants to the Power Exchange at a huge profit, and then buying it back from themselves. In this way they have racked up $6 billion in addition to the $28 billion bailout. They fail to subtract this from their claimed losses, since it's in a different pocket.

Further, the supposed shortage of power plants is a myth; the industry has 45,000 megawatts, or 50 percent more than the generating capacity currently needed. The Wall Street Journal reports that 461 percent more capacity was off-line in August 2000 than a year earlier. Reasons for plants being off-line are considered proprietary information, and are not disclosed by the utilities.

That the shortage is artificial is shown by the fact that Los Angeles, the heaviest power user in the state, has been able to keep its lights burning uninterruptedly throughout the crisis - and at that, for up to 25 percent less than SCE and PG&E charge their rate payers. LA maintains its own regulated public utility, which can generate and sell electricity without taking into account the needs of investors.

Other states that are having second thoughts about the merits of deregulation are wise to do so; the California debacle demonstrates that power is far too important to be left to the profit motive.

Juneau resident Ron Reed helped organize the Southeast Alaska Greens in 1990. He has been researching and writing about corporate and political issues for more than 20 years.

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