California Gets It Half-Right

We are now a full decade into wholesale electrical deregulation, courtesy of a bought or heedless Congress, and a half-decade into retail deregulation under the auspices of the various states, a copycat reaction to the federal disengagement. Ordinary consumers were not consulted about either process; they were presented instead with a fait accompli and are now being forced to adjust. If the imposed changes are allowed to stand, the adjustment won't be easy, as California is proving on an almost daily basis.

At the national level, the clamor for deregulation was led in the early 1990s by free-market ideologues and private-power lobbyists, the latter representing large, corporate energy producers like the Houston-based triumvirate of Enron, Reliant Energy Services, and Dynegy Power, all major players in the California market. Their legislative success took the form of the Energy Policy Act of 1992 (EPAct), which permitted an open market for the interstate wholesaling of electricity at the discretion of the Federal Energy Regulatory Commission (FERC), the industry's erstwhile regulator. Implemented by FERC in 1996, the EPAct quickly produced widespread "gaming" of the power system (a process by which wholesale supplies of electricity are manipulated to create artificial shortages for maximum financial profit), leading last year to spot-market prices that rose as much as 500 to 1,000 percent (estimates vary), an unprecedented windfall for the wholesalers.

At the state level, deregulation of the retail market in the mid-1990s was primarily sought by a concert of vested business interests that viewed it as potentially working to their advantage. In California, the successful lobbying coalition included Silicon Valley's high-tech firms, which visualized free-market competition lowering their considerable electric bills, and the state's big private utilities, servicers of three-quarters of its residents, which conversely saw the free market, absent rate regulation, as likely to increase their profits. No one apparently deciphered the obvious conflict between these two grasping objectives. In any event, neither scenario came to pass; wholesale price competition never developed, and soaring retail prices were frozen by state regulators fearful of a public revolt.

As things now stand, there is a financial sword of Damocles hanging over customers of California's private utilities, a sword that will fall with sickening effect if retail controls are suddenly lifted. That happened not long ago in the Canadian province of Alberta, where a deregulated electricity market led to a tripling of retail rates virtually overnight. The fortunate minority of California power consumers serviced by nonprofit municipal utilities is under no such threat, however; none of the state's public-sector "munis" have imposed radical rate hikes, despite the turmoil around them.

Logic suggests, therefore, that the answer to California's (and the nation's) looming electricity mess lies in a broad expansion of public power. There is always the option, of course, of returning to the regulated private-monopoly system we are now dismantling. It works, after a fashion, but has always had the inherent flaw that the regulators can be "captured" by the industry they are regulating, becoming its protectors and advocates. A case in point is the business-friendly FERC, whose free-market-oriented commissioners first accelerated electric deregulation by administrative fiat in the 1990s and now refuse to exercise their authority to control the skyrocketing wholesale power prices that have resulted.

Bureaucratic dereliction of duty is a constant worry under a regulatory system, but living with that concern is better than accepting the dangers of a decontrolled market, where economic greed always has full rein. Despite glib promises of price competition, the electricity rate trend since the start of deregulation has been steadily, inexorably upward. Growing oligopolistic control of the private power sector -- the worst industry concentration since the early 1930s -- has made this inevitable.

In the half-dozen years following the 1992 passage of EPAct, 56 utility holding-company mergers were announced -- with the blessing of the FERC commissioners, those supposed guardians of the public interest. The merger rate tripled after actual implementation of wholesale deregulation in 1996, and it continues unabated, culminating most recently with the $27 billion pending acquisition of Entergy Corp. of Louisiana by Florida Light & Power Group, which will create the nation's largest electric utility, a multi-state monstrosity controlling the destinies of some seven million power customers along the eastern seaboard. According to energy-policy analyst Scott Ridley, major Wall Street investors now favor a "40 in 5" strategy, whereby the country's approximately 240 existing private utilities would be reduced to 40 within a five-year period; others foresee fewer than a dozen global holding companies eventually exerting total dominance over the US power market.

So, here are the three choices: 1. Deregulation and the Russian-style "shock capitalism" it will certainly bring, replete with high, monopolistic prices and uncertain supplies; 2. Reregulation and a return to the imperfect but workable status quo ante, with state public utility commissions setting prices and allowing reasonable profit margins to private shareholders; or 3. An expansion of the public generation and transmission of power, and the opportunity to provide inexpensive electricity at cost outside the market system and under democratic control. The optimum choice -- an enhancement of public power -- is obvious.

The progressive politician who moves us in that direction could emerge as a liberal hero in time for the 2004 presidential election. It just might be Gov. Gray Davis of California, whom fate has placed in a position to make history. The operable question is whether or not Davis, a cautious and heretofore bland presence on the political stage, is up to the challenge. At present, there are both encouraging and troubling signs. On the plus side, the governor has been rhetorically correct in calling his state's deregulation scheme "a colossal and dangerous failure." He has also accurately identified the primary villains in the piece, the corporate "market marauders," who have exploited deregulation, and the retrograde FERC, which (with the backing of the Bush administration) has rejected his call for wholesale price caps on interstate energy transactions.

More concretely, Davis has signed legislation putting California directly into the power business by giving state officials authorization to by-pass private utilities and negotiate cheaper, long-term energy contracts on the open wholesale market and to sell electricity directly to consumers. He has further proposed a state takeover of California's privately owned transmission lines, affirming that he has "no philosophical objections" to such a violation of free-market dogma. The governor has likewise suggested assisting municipal utilities in building additional publicly owned power plants and has even broached the taboo topic of a state power authority.

So far, so good, but there are mixed signals coming from Sacramento. On the down side, Davis takes policy advice from executives of the state's suspect private power companies and in the past has also taken their money -- $500,000 in campaign contributions last time out. The apparent quid pro quo is his pledge to save the debt-laden utilities from bankruptcy and his stated reluctance to seize their hydroelectric plants, a suggestion some have made.

The governor seems to be trying to walk a tightrope, endeavoring to satisfy all sides in the power controversy. To date, he has gone half way toward comprehensive public power in California, but no farther. Sooner or later, he will have to choose between rescuing the deregulated private utility system from its own excesses, or creating a full-fledged public utility system that benefits all of the people of his state. We'll soon see if there's a new political hero ready to ride out of the West.

Wayne O'Leary is a writer in Orono, Maine.

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