Gridnapped!: Electric Deregulation's Ransom

by J.A. Savage

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.

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 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."