Albion Monitor /Commentary
[Editor's note: See also Alexander Cockburn commentary from earlier this year.]

How Electric Deregulation Will Cost You Thousands of $$

by J.A. Savage

Big corporations anxiously anticipated telephone deregulation to lower the cost of talking to clients in faraway places. Business flyers couldn't wait for airline deregulation to lower the cost of jetting to all those important meetings. Now, businesses that consume lots of energy can't wait for electric industry deregulation.

But, just like the other industries where vacationers pay more than Citibank executives heading for Hong Kong and phoning your mom costs more than phoning clients for IBM, individual electric ratepayers will be on the hook to subsidize businesses that will benefit from electric deregulation. Individual ratepayers will also subsidize profits for electric utility shareholders.

Utility management figured out how to make deregulation work in their favor -- and stick small ratepayers with the bill
States are deregulating electric utilities one-by-one at the behest of big consumers from steel manufacturers to department store chains. Congress is expected to fall in line in the next year offering national legislation to allow electric competition.

California will be the first to deregulate on a massive scale beginning January 1998. Massachusetts is a nose behind. Other states like Texas appear ready to commit but are watching California closely as the state with 10 million electric customers takes the plunge.

Companies that use scads of electricity lobbied California regulators five years ago to get them to do something about the high cost of electricity. California may be the golden state, but the price is high -- electricity costs about 50 percent more than the national average. At the time, the state was in economic doldrums in general due to the evaporating defense industry. Business lobbyists threatened regulators with relocating to other, cheaper states.

The all-Republican California Public Utilities Commission has a soft spot for big business' concern over the price of electricity. Adopting the role of state economic booster, as well as taking the opportunity to make history, commissioners offered to deregulate.

At first, this move had the nicely protected electric utility monopolies wailing. "No. Please. Don't deregulate us!" they cried.

For the last 62 years under mandatory federal regulation "to eliminate the evils" of unruly, and often fraudulent, electric providers, utilities got comfortable working in a cost-plus environment. Unlike every other business entity which has to figure out how to make something or offer a service at a price people are willing to pay, utilities got to offer whatever they damned well felt like offering and consumers had to pay simply because utilities are regulated. It started out on a small scale -- utilities built a few dams, a few small coal plants and oil-fired turbines. But it escalated. The coal plants grew into excuses to strip mine. Then, nuclear power came along. All this arrived with not only a price tag for construction, but a guaranteed stream of interest payments to utility shareholders.

If subject to competition, these utilities will suddenly have to face the capitalist world of no guarantees. Their decisions will not automatically be supported by ratepayers. Competition scares the pinstripes off of utility executives.

But as deregulation unfolded, utility management figured out how to tip the scales, change the whole paradigm and make deregulation work in their favor -- and small ratepayers will be stuck with the bill. To counter big business' calls for cheaper electricity, the concept of "stranded assets" was hatched.

Remember that phrase --"stranded assets." It is code for "utility bailout." Assuming deregulation sweeps the other 48 states, the stranded asset bailout rivals that of the savings and loan bailout.

The con of "stranded assets"
Utility management invested in unusually expensive and often unnecessary facilities in order to provide electricity. It's resulted in colossal polluting machines like coal plants, gravity-defying engineering like pumped-storage plants, and the all-time money pit and scary technology of nuclear power. All management had to do was convince regulators -- usually technically naive and in the job for political, pension or self-aggrandizing reasons -- that the projects were sound. Regulators' approval guaranteed utilities that ratepayers would pay for building the facilities, as well as decades worth of interest payments to be shipped onto utility shareholders.

One of the most egregious incidences -- and one that goosed California's electric rates far beyond the norm -- is the Diablo Canyon nuclear plant. The plant ended up costing $5.5 billion to build. But after being in service for 10 years, ratepayers have paid over $25 billion for the plant to Pacific Gas & Electric shareholders. That's not enough for PG&E. The utility claims that ratepayers still have to pay more to its shareholders, that the plant is a "stranded asset."

A stranded asset is anything that a utility invested in that cost more than a competitor can come up with for the same job. For instance, power from Diablo Canyon cost in the vicinity of $0.12 per kilowatt hour (kWh) due to the high cost of construction and interest payments. Electricity from a natural gas-fired turbine only costs about $0.025 per kWh; from a windmill, about $0.05 per kWh.

A utility competitor, say someone with a windmill, then, could offer electricity to consumers at half the price of electricity from the utility-owned nuke. Utilities say this is unfair. They claim that they only invested in the nuke in the first place to provide public service. They say that throwing them into a competitive market would wipe them out. They're probably right. They want ratepayers to pay off their stranded assets in order for them to be competitive.

In California, regulators ordered ratepayers to pay off all utility stranded assets, about $30 billion worth. Nationwide, it's estimated that stranded assets will cost about $200 billion -- the bailout would cost about $2,200 per household, according to energy economist Bill Marcus. And that's just the principal, not the interest payments.

But utilities made a deal in California. In return for paying off their outstanding debt, they accepted a lower interest rate on it and put it in a shorter time frame. So, instead of paying 12 percent interest for another 20 years on Diablo Canyon, ratepayers will pay off the plant in four years at 7.35 percent. Facing overwhelming opposition from legislators and regulators, consumer advocates reluctantly went along with the deal. They originally wanted utilities to cop to the fact they made bad investments and write off the debt, just like real corporations do when management makes bad investments.

Even with the deal, California's bailout will represent 40 percent of small ratepayers' bills for the next four years, reducing to10 percent or so until 2006.

Utilities ebrace tactic pioneered by the Wise Use Movement
Utilities around the nation want similar bailouts. They claim they have contracts with regulators and that asset write-offs or write-downs constitutes a breach of contract. They have claimed -- and legal scholars think correctly claimed -- that if ratepayers do not bail them out they can file federal lawsuits to get the money. This tactic was pioneered by the Wise Use Movement. The Wise Users say that any time they cannot use their property as they see fit --like building a shopping mall that would wipe out an endangered butterfly --they can file suit under the "takings" clause of the Fifth Amendment. Utilities loudly claim that no bailout equals a "takings" and states are loath to expend resources on that court fight.

Electric deregulation appears to be an unstoppable force. But consumer advocates maintain it does not have to be the bailout in every state that it's come to in California.

J.A. Savage is an editor at California Energy Markets

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Albion Monitor December 22, 1997 (

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