www.DukeEmployees.com - Duke Energy Employee Advocate
Electric Deregulation - February, 2001
L. A. Times - By MIGUEL BUSTILLO - February 22, 2001
More than half of the 26 financial firms hired to oversee California's record $10-billion bond issue to buy electricity reported business ties to utilities and energy companies, including many of those at the center of the state's power crisis...
COMPANY: Blaylock & Partners
COMPANY: CIBC World Markets
COMPANY: J.P. Morgan Securities
COMPANY: Merrill Lynch
Morgan Stanley Dean Witter
L. A. Times - By NANCY VOGEL - February 20, 2001
Seeking to bring stability to the state's volatile energy market, the Davis administration has been working for weeks to negotiate long-term, fixed power contracts that would assure Californians of an ample supply at a fair price...
At least one power supplier said it is not willing to sign a deal with the state until the utilities pay off their debt.
"It's our intent to be made whole before we sign a contract," said Tom Williams, spokesman for Duke Energy North America, a Charlotte, N.C.-based company with four power plants in California. "Those who think we're bluffing are wrong."
Whether the utilities get a cash infusion to pay off creditors depends upon a game of brinkmanship now underway among lawmakers, the governor, utilities and consumer groups. Davis announced a plan Friday to pull Edison and PG&E from the edge of bankruptcy in part through state purchase of their transmission grid. But it could be weeks before agreement is reached and locked into law.
And some lawmakers say that, as part of that agreement, the generators should be willing to write off a portion of what the utilities owe.
"I can't see any reason why Duke and Southern and Reliant and Dynegy, whose stock has soared and who have made phenomenal amounts of money during this period, ought to be the only ones who come out of this without having to give something," said state Sen. Debra Bowen (D-Marina del Rey), chairwoman of the Senate Energy Committee.
"The generators, bondholders and others who benefited significantly from the transactions that caused the utilities to become insolvent," she said, "have to put some skin in the game too. They don't get to be made whole at the expense of California ratepayers."
New York Times - By PAUL KRUGMAN - February 18, 2001
Treason doth never prosper: what's the reason?" asked Sir John Harrington. "Why, if it prosper, none dare call it treason." Fortunately, the stakes are lower these days. A modern version might read: "Deregulation never fails: what's the deal? That when it fails, they say it wasn't real."
On the face of it, California's electricity debacle is an object lesson in the risks of deregulation. The magic of the free market was supposed to provide abundant, cheap, clean power; instead the state faces not only shortages and skyrocketing prices but also insistent demands that it relax air- quality rules. The only bright spots — literally — are a few cities, including Los Angeles, that own their own power systems.
Nonetheless, a growing chorus denies that deregulation was at fault. According to what seems to be becoming the conventional wisdom, meddling bureaucrats prevented the state from having "real" deregulation, creating instead a neither-fish-nor-fowl system that combined the worst features of both worlds. It's a comforting view: it lets true believers in the infallibility of free markets cling to their faith, and it also lets deregulators in other states continue to claim that it can't happen here.
Alas, a close look at the claims that California's deregulation wasn't "real" suggests that while the deregulation was indeed flawed, the flaws didn't cause the catastrophe.
To understand the limits to California's deregulation, recall that it separated the power industry into two pieces. Generators, mainly owned by out-of-state companies, produce power and sell it wholesale to utilities, which then sell retail power to consumers.
One way in which California didn't fully deregulate was that while prices in the wholesale market were decontrolled, the prices charged by utilities continued to be fixed by the state. This meant that even when power shortages sent wholesale prices sky high, homes and businesses had no financial incentive to conserve electricity. The history of retail price control is a little odd; it was actually a temporary measure intended as a sweetener for the utilities, a way to let them earn some extra profits in the face of what were expected to be falling wholesale prices. As it turned out, however, the rigidity of retail prices made it harder for the state to cope with its crisis.
But would it really have made a big difference if those prices had not been fixed? All the evidence suggests that to reduce demand enough to eliminate today's shortages retail electricity prices would have to rise enormously — and that such a rise would be politically unacceptable. In fact, in San Diego the original retail price freeze ended before the crisis struck. But when prices suddenly tripled last summer, a firestorm of public outrage forced the imposition of new controls.
Another way in which deregulation was incomplete was that regulators prevented the utilities from entering into long-term contracts to buy power, forcing them instead to buy wholesale electricity in a short-term "spot" market. Soaring spot prices have bankrupted the utilities, and are forcing the state government to spend billions to keep the power flowing. If the utilities had locked in large supplies at lower prices, they would not yet be bankrupt — but they would still be hemorrhaging money.
While long-term contracts might have postponed the financial day of reckoning, would they have made more power available? Some say yes: if much of their output were under long-term contract, the generators would have less market power — that is, less incentive to restrict output in order to drive up spot prices. The generators, of course, vehemently deny that they are doing any such thing, despite circumstantial evidence that they are. If we accept their denials, long-term contracts would have done nothing to prevent the current power shortages.
And whose idea was it to prevent long-term contracts anyway? In 1999, some of the major utilities petitioned for the right to sign such contracts. Consumer groups, which initially had qualms, eventually supported the bid. But the regulators turned the request down, largely because any change in the rules to allow such contracts was fiercely opposed by, you guessed it, the generators.
There's a myth in the making, one that portrays California as a victim, not of deregulation gone bad, but of quasi-socialist politicians who didn't give deregulation a chance to work. Well, that's not the way it happened. The defenders of deregulation should stop making excuses and look seriously at what went wrong.
Yahoo News - By David Howard Sinkman - February 17, 2001
However history judges California's electricity crisis, currently it looks like a whodunit with an illusive villain behind the sporadic power cuts plaguing the richest U.S. state the past two months.
Consumer advocates and some politicians accuse the utilities, many of them out-of-state, of manipulating the newly deregulated power market by shutting down power plants for maintenance in order to drive up prices.
The power producers vehemently deny these accusations, saying that the fault lies with old plants driven past breaking point by energy-hungry California. The plants have had to be taken out for urgent maintenance, the companies argue.
Given these entrenched positions and a lack of public information, finding out what has really been going on is far from easy, analysts and consultants say.
``It is impossible to determine whether a declared forced outage occurs because the plant is actually unable to operate or because this action increased the firms' profits,'' said Stanford University Economics Professor Frank Wolak, a member of California's market-monitoring Independent System Operator (ISO).
Certainly, figures show that power producers have taken down more of California's capacity to produce electricity in the past year than in the previous 12 months.
In August, for example, 3,391 megawatts of capacity was out of service in the most populous U.S. state, a 461 percent increase from the previous August. Wholesale prices have spiked as well, with the value of electricity sold in California in 2000 almost quadrupling to $27.97 billion from $7.43 billion in 1999.
And, consumer groups point out, California was able to meet demand of 45,000 megawatts last summer, but now, in the low-demand winter months, the state is suffering from rolling blackouts even though demand is less than 30,000 megawatts.
Up to 13,000 megawatts of Californian capacity was off-line in January for undisclosed reasons, consumer advocacy group Public Citizen said.
Plant maintenance typically is carried out in the winter because that is when demand is lowest. Some plant outages, such as at certain units of Duke's Moss Landing plant, are linked to extensive upgrades required to meet strict emission standards.
The Federal Energy Regulatory Committee (FERC) says there is no evidence of manipulation by the producers. It reported Feb. 1 that plant outages in California beginning on Dec. 13 were due to maintenance problems at old plants that were run too hard in the summer.
But, critics note, FERC conducted 60 percent of its audits of California power plant outages over the telephone using questionnaires. ``FERC's inspection was like a principal calling a kid who is cutting school and asking if he is sick,'' said Mindy Spatt, media director of The Utilities Reform Network (TURN) consumer group.
Under political pressure, ISO, the traffic controller for 75 percent of the state's energy demands, began releasing daily data on the size of plant outages on Jan. 25, but not the reason why.
``Because details on why these plants are off-line is confidential, the public is literally left in the dark,'' said Wenonah Hauter, Public Citizen's director of energy programs.
Confusion over responsibility for the power shortages has also increased in recent weeks because some power producers have been reluctant to sell electricity to California's two main utilities, Southern California Edison, a unit of Edison International, and PG&E Corp., amid fears that they will not be able to pay for it.
With so little transparency, the allegations of manipulation thrown against the producers have been flying thick and fast.
``The companies are playing with marked cards. I think consumers know when they are being conned,'' said San Francisco City Attorney Louise Renne, who is suing 13 power generating companies on behalf of the citizens of California.
The producers are just as vehement in their response.
``Quite honestly, it is getting offensive,'' said Cathy Roche, director of external relations at Duke Energy Corp., which has 3,350 megawatts of generating capacity in the state. ``The public and politicians wanted a villain, but they picked the wrong one.''
Incomplete information about the causes behind individual plant shutdowns and soaring wholesale energy prices is not just a California problem.
In New England, the average amount of generating capacity out of service each weekday rose by 47 percent in the 12 month period following deregulation in May 1999, said the Union of Concerned Scientists (UCS), an environmental advocacy group.
These outages have contributed to increased price volatility and higher average monthly prices, UCS said.
``By declaring some of its plant unable to run, a firm can create an artificial scarcity of generation capacity,'' said Wolak. ``The generating firm is then able to set a very high market clearing price which is earned by all of its operating units.''
But without specific plant and supplier date data, the UCS said it is not yet possible to determine definitively whether generators are withholding capacity to raise prices.
What is needed in California and New England is a full investigation plant by plant for the reason why sites were shut down or operating at less than full capacity, said David Schlissel of Synapse Energy Economist Inc., an energy research and consulting firm. He added that full disclosure of FERC's data and past figures would help explain any outage abnormalities.
L. A. Times - By GEORGE SKELTON - February 15, 2001
Call it corporate hardball. That's the polite term. Many are just calling it blackmail.
Hardball or blackmail, it's an example of why there's growing support in the Capitol for the state venturing into public power.
"My goal is to give us some control over our destiny," Senate leader John Burton (D-San Francisco) told the Senate Energy Committee Tuesday.
Referring caustically to the "outside profit makers," Burton asserted: "We think they're going to look after our interests? It's been shown that nobody has looked after our interests except us."
The hardball is being played by several out-of-state power generators owed hundreds of millions by Edison and PG&E for wholesale electricity. The generators are refusing to sign long-term contracts with the state to supply affordable power until the state guarantees they get their money from the deadbeat utilities.
That's a problem between the generators and the utilities, state negotiators keep insisting. But, clearly, it's also a problem for the state. Because the longer this impasse goes on, the longer the state must shell out an average $45 million per day to buy power on the sky-high daily market.
The state already has pumped out enough tax money to build two or three power plants.
"It's wholesale blackmail," says one official familiar with the contract negotiations. "Is it illegal? No. Is it ethical? Whewww!"
Davis and the Legislature are trying to devise a bailout--or asset buyout--to rescue the utilities. But state negotiators are refusing to link that to the long-term supply agreements. For one thing, the generators may have to eat some of the money they're owed.
After all, it was the generators' gouging of the utilities--reaping markup profits of 100%-300%-500%--that drove Edison and PG&E toward bankruptcy in the first place.
Duke Energy, one of the holdouts, put its hardball strategy in writing in letters to the governor and legislative leaders.
Any long-term contract must be "part of a comprehensive solution to the energy crisis," the North Carolina company wrote. "Part of the comprehensive solution must include assurance that our past due receivables will be collected."
Says Burton: "They got a long wait."
Burton told reporters about a meeting he had with an out-of-state power executive: "I said, 'You're telling me'--pointing to one of his people--'he owes you money, so you're not gonna sell him anything. I've got cash, you're not gonna sell me anything cash back because he owes you money?' I says, 'See ya later.' "
"If they try playing the people of California for chumps," Burton continued, "that would be the time to move in and let 'em know what the laws of the state are. And the laws of the state say we can grab your plant.
"And then they say, 'Well, who else is going to build plants here if you do that?' And my answer would be, 'The people of the state of California through a public power authority. And you guys can go peddle your stuff, you know, in Mexico.' "
Burton's also a hardballer. But Davis has the ball. And nobody's quite sure about him.
Bloomberg News - February 12, 2001
Duke Energy Corp. sued the California Independent System Operator and the state's Department of Water Resources on Monday, claiming they are violating their own rules by delivering power to insolvent utilities. The energy trader's suit, filed in U.S. District Court in Los Angeles, seeks a court order to stop Cal-ISO from delivering electricity to Edison International and PG&E Corp. Cal-ISO is "forcing suppliers to provide energy effectively for free, since Cal ISO continues to deliver electricity to the insolvent utilities with no credit or security in place," Duke said in the complaint.
L. A. Times - By NANCY CLEELAND - February 12, 2001
A coalition of unions, environmental groups and consumer advocates has jumped into the California energy crisis with its own 13-point blueprint, to be unveiled Tuesday in Sacramento.
Among other things, the plan calls for no retreat on labor and environmental protections, and no rate increases for low- and fixed-income consumers.
It is harshly critical of utilities and power generators, and recommends creating a public power authority for the wholesale market. At the same time, however, the plan says utilities should be saved from bankruptcy, which would "place the fate of our state's power system in the hands of a federal judge, and strip Californians of a voice through our elected officials."
The groups complained that they have been shut out of negotiations toward solving the ongoing crisis, which threatens to bankrupt two major utilities and is draining the state treasury. "Any proposed solution must protect the interests of California's working families and consumers," the coalition said in a five-page outline of its plan.
"Corporate interests seek to capitalize on a crisis mentality to weaken labor and environmental protections," the groups said. "Workers and the environment should not bear the burden of repairing the damage caused by corporate greed and mismanagement."
Pulled together by the California Labor Federation, the coalition includes the Sierra Club, the California League of Conservation Voters, the Congress of California Seniors and the Utility Reform Network.
Union members from utilities, as well as from manufacturing firms hurt by a series of power interruptions last month, were represented. The recommendations were developed over the past two weeks, said federation spokeswoman Sharon Cornu.
The coalition contends that after power plants were sold under deregulation, new owners cut staff and skimped on maintenance, contributing to current shortages.
There were some mixed messages from the diverse coalition, which includes long-standing critics of the utilities as well as unionized utility employees, who have asked the PUC to stop planned layoffs.
For example, the plan seeks to preserve current employee benefits and union contracts at the utilities, but also recommends that the firms absorb a large share of the multibillion-dollar debt racked up since wholesale energy prices skyrocketed last summer.
New York Times - February 11, 2001
The largest planned blackout of electricity in California since World War II came in the midst of a heat wave last June, when the mercury hit 103 in San Francisco, and air-conditioners roared. Electricity supplies fell to dangerous levels, and utilities cut power to more than 100,000 homes.
Even more of a shock than the thermal blast in a city known for chilly summers was what came next.
In July, temperatures moderated and energy use fell, but electricity prices still spiked up to the highest ever seen for that month. California utilities paid about $4 billion more for electricity than they did in the summer of 1999.
This pattern has continued. Even now, when energy demands in California are at the low ebb for the year, electric power has been selling at some of the highest prices ever seen.
The attorneys general in California, Oregon and Washington are investigating whether the handful of power companies that sell electricity to the state manipulated the market, cutting back supplies to set off the threat of blackouts — which then led to higher prices and profits. The companies deny that they did.
What happened to throw the normal laws of supply and demand out of whack can be largely explained by the system that California created when it deregulated power three years ago. A backwater agency that was never intended to buy power at competitive rates became a panicky buyer at the mercy of a new breed of energy company that sold electricity like pork bellies in a fast-moving commodities market.
"The simple fact is that a handful of people who were really smart figured out how to make a ton of money selling the same product in essentially the same market conditions as before at 10 times the price," said Michael Kahn, chairman of the California Electricity Oversight Board and co-author of a state study on how the market here collapsed.
The deregulated market quickly took on a life of its own. "You don't put your entire retirement money in a day trader's hands, and we did that — that's crazy," said Kellan Fluckiger, chief operations officer of the California Independent System Operator, the agency created to run the state grid that eventually became the most significant buyer of power.
And in this market, on any given day, at any given hour, California was all but broadcasting to sellers of electricity how much power it needed to buy, and that it would ultimately pay the highest possible price to get it. The sellers capitalized on that, especially on days when California was pinched by other sources of power such as hydroelectric power from the Northwest.
"Did they break the law? They didn't have to," said Steve Klein, superintendent of Tacoma Power, one of many West Coast utilities that got snared in California's troubles.
The eight publicly held, mostly out- of-state companies that generate most of the power for California include some of the biggest names in the business, like Reliant Energy and Dynegy, both based in Houston, and Duke Energy of Charlotte, N.C. They made huge profits last summer, in some cases more than 700 percent over the year before.
These companies say that market conditions — or "unique seasonal dynamics," as one company called last summer's energy woes — presented an opportunity to make record profits in a deregulated environment. And they blame the deregulation law's requirement that the utilities not enter into long-term contracts.
"They didn't have to wait till the last minute to buy all that power," said John Stout, a senior vice president at Reliant Energy. "In any negotiation, if a buyer has to have something, then the longer he waits to buy it, the more the negotiating strength shifts to the seller. That was a choice that California made."
In recent weeks, California has committed $10 billion in bonds to buy long-term power contracts that will be passed on to the struggling utilities.
The people who are running what is left of the deregulatory experiment, now largely abandoned, are still paying record prices for power as they struggle through a 25th day of stage three emergency, a period when blackouts are imminent.
"They know that we're desperate," said Jim McIntosh, referring to the companies that sell power to the grid. "We don't have any leverage to do deals," said Mr. McIntosh, director of scheduling at the system operator.
Nor were the buyers trained in sophisticated trading techniques. "We hired the very best system reliability operators, the people who know how to keep the lights on," Mr. Fluckiger said. "In terms of matching wits with some M.B.A. who's got a Ph.D. in chaos theory, who's working on the derivative of whatever, the answer is no way. We can't do that."
He and other state buyers operate out of a nondescript building in this Sacramento suburb, desperately calling sellers from a room with a NASA-like scheme of power lines and a motto in huge letters proclaiming the deregulation era's promise of "Reliability Through Markets."
The flawed market was one of many factors in California's energy debacle. A dearth of new power plants, unusual weather, high natural gas prices and environmental restrictions have all been blamed. But the regulators say that the market allowed these factors to come together in what some call a perfect storm convergence.
In trying to unravel the mystery of how prices could skyrocket in California even when people were using the same amount of electricity as before, or less, investigators cite two areas of suspicion.
Some regulators contend the California market was toyed with by sellers of electricity to give them an unfair advantage. And they question whether the sellers deliberately took their power plants out of service to reduce available supplies to drive up prices. The regulators point to last August, for example, when the number of power plants out of service was nearly five times greater than in the previous August.
California's deregulated system is like no other. One side — the utilities that buy power and deliver it to customers — remained under state control, with rates for most residential customers frozen until 2002. They sold most of their generating plants, and were largely prohibited from buying long-term electricity contracts. The action would take place on a daily spot market.
The other side, the companies that bought the California plants and now generate power and sell it to utilities in the daily market, was free of state regulation. This imbalance became graphically evident last year, as the buyers, or utilities, plunged into near bankruptcy, losing more than $12 billion, while the power companies that sold them electricity made record profits. For just five days last June, for example, more than $1.4 billion changed hands.
On days when demand was high, some companies had enough electricity that they could withhold to tip the market into an upward price spiral, according to a state regulatory report.
Until the system was dismantled last month, electricity was bought and sold in the California Power Exchange, where buyers and sellers would bid for electricity to be used on the next day. Demand would be matched to supply by a new state agency, the California Independent System Operator.
Only when there was not enough electricity bid a day earlier to meet demand would the system operator have to declare an emergency and buy electricity, usually at exorbitant rates, or risk turning out the lights for parts of the state. The system operator was "a captive buyer of last resort," state investigators wrote in a study done last fall.
No one expected the agency to ever handle much more than 5 percent of daily demand; but at times in the past year, it has been buying almost one-third of all California's power at high last-minute prices.
"It was like buying house insurance when your house is already on fire — you'll pay anything for it," said Robert McCullough, a former utility executive and energy analyst who has done several studies of the California energy disaster.
On the issue of whether the power failures were deliberate, the Federal Energy Regulatory Commission said in a recent report that it could find no proof that companies took their generators out of commission to drive up prices.
For much of the last six months, power plants have been out of service at historic high levels, raising the suspicions of consumer groups and others. A spokesman for Gov. Gray Davis, a Democrat, called the federal finding a "see-no-evil, hear-no- evil type of audit."
The San Francisco city attorney, Louise H. Renne, said a lawsuit the city has filed against the energy companies that supply power will ultimately show that the industry was playing with "marked cards" that allowed it to illegally "take advantage of a deregulated market to make a quick buck." The companies say California's problem is simply that it does not have enough plants and that too many of its generators are old and need frequent repairs.
A state bailout to buy future power will commit every person in California to a bonded debt of about $300, even though the market was restructured at the end of last month.
The fear is that the state will wind up getting hit coming both in and out of its deregulation debacle — for it is possible that as new energy plants go into operation and suppliers finally have to engage in fiercer competition, the prices to which California may commit itself in long-term contracts now under discussion may turn out to be far too high.
Now, condemnation of deregulation seems universal. But in the beginning skeptics were rarely heard, even though there were warnings.
Mr. McIntosh, the scheduling director at the power agency here and a 29-year veteran of the regulated electricity world, recalls being invited by a group of out-of-state energy companies to a Colorado resort five years ago for a "pick-your-brain" conference on how deregulation would work.
"They had a group of M.B.A. types out there that were already figuring out how they were going to make money in the California market," said Mr. McIntosh, who came back to California and wrote a memo to his bosses at Pacific Gas and Electric about the session.
"These guys are going to eat our lunch," he said he recalled writing. "And the rest of California's. And they have."
tompaine.com - February 8, 2001
As Californians struggle to keep the lights on, there are important lessons that the rest of the nation can learn from this deregulatory disaster. To set the scene, five years ago California led the nation with a bill that deregulated its electricity system. The promise was that the wonders of competition would give consumers a vast array of choices at much lower prices. To ensure the latter, the legislature actually wrote a rate cut into the law. As things stand now, the state's two biggest utilities are standing on the brink of bankruptcy. Residents in many parts of the state are living in constant fear of blackouts, which have occurred sporadically over the last three weeks. And, virtually everyone agrees that consumers will have to pay more (i.e. not less) in coming years for their electricity.
What went wrong? The short answer is that the electricity market is not quite as competitive as the proponents of deregulation led people to believe. It turns out that there is much more money to be made by supplying a small amount of electricity at a high price than a large amount of electricity at a low price. Therefore, in the interest of generating profits for its shareholders, the power companies in the area are not generating enough electricity for California's economy.
Of course the whole story is more complex than this, and the deregulators will claim that the problem was not really deregulation, just that California didn't deregulate in the right way. But this is like saying that central planning is the way to run an economy, the Soviet Union just didn't get it right. That one won't fly.
The basic fact is that people of California got suckered into supporting a policy that was driven by an ideology which says deregulation and markets are always good, and the government is bad. There were plenty of economists who could have easily explained why California's deregulation plan was doomed to fail, but these people were ignored. Instead, at the urging of the power companies that stood to profit, and the prophets of the free market, the state puts its power system at risk. Now it is paying the price.
In addition to dealing with this disaster, the nation should also try to learn from it. The most important lesson to learn is that an unregulated market does not always do things best. This is often going to be the case in an industry where there are a relatively small number of competitors, like the electricity generation market, and possibly also the airline industry. California's regulated electricity system surely was not perfect, but it did its job, providing the population with a secure source of electricity at a reasonable price for most of a century. It would have been more reasonable to modernize the system of regulation, to take advantage of possibilities offered by new technologies, rather than discard the system in its entirety.
But electricity deregulation isn't the only place where policy is being driven by free market ideology rather than common sense. The push to privatize Social Security similarly defies logic. Every serious analysis shows that replacing Social Security with individual accounts will lead to administrative costs running into tens of billions of dollars annually. This money is taken directly out of workers' retirement nest eggs. The experience of nations like Britain also suggests that many account holders are likely to fall victim to deceptive sales people and end up taking a bath on their holdings. Individual accounts are a bad substitute for a system which, all experts agree, can pay every penny of scheduled for nearly forty years, and will always pay a larger real benefit than that received by current retirees, with no changes ever.
Similarly, the plan to replace Medicare with vouchers would have been long dead if anyone looked at the evidence. More than one-third of the Medicare beneficiaries who have signed up with HMOs have already been dropped. The HMOs claim that they can't make a profit with the prices paid by Medicare. Let's take them at their word. They are apparently less efficient than the government in providing health care to the elderly.
Deregulation can provide substantial benefits when it is based on serious analysis of the industry. For example, in 1984 Congress passed the Hatch-Waxman Act, which made it easier for generic drug manufacturers to compete with the brand name producers. As a result, the price of many prescription drugs fell by 80 percent or more. Unfortunately, the same sort of analysis was not driving electricity deregulation in California.
Anyone can make a mistake, but only a fool repeats the same mistake twice. The free market ideologues got the people of California to put their economy and even their safety at risk in a foolish deregulatory scheme. The nation should learn from this failure. We can't afford to jeopardize the retirement security of our workers and the health care system for the elderly. The proven success of Social Security and Medicare is better than the predictable failure of the privatization of these two programs.
L. A. Times - By ELIZABETH SHOGREN - February 8, 2001
Alarmed by California's power crisis and what it could mean for electrical grids across the country, officials in state after state are flipping the switch off--at least temporarily--on their own deregulation plans.
The backlash will slow, by several years at least, the transition from state-regulated to free-market electrical systems, short-circuiting a public policy trend that seemed almost unstoppable not long ago.
"I would say that California's problems have put a very, very definite slowdown or halt on every state's deregulation effort--if they're not so far into it that they can't turn back," said David Hoyle, a state senator in North Carolina. "It would be impossible to pass legislation that starts any kind of process to deregulate until we get to the bottom of California's problems."
Among the 24 states (plus the District of Columbia) that have approved deregulation plans, Nevada, Arkansas, New Mexico, Montana, West Virginia and Oklahoma have delayed or appear likely to delay their efforts. Of 18 states that were actively investigating deregulation or have legislation pending, Minnesota and North Carolina already have stalled their efforts.
The momentum behind a proposal for federal deregulation legislation also has collapsed.
For Hoyle, one of two North Carolina legislators charged with crafting an electricity deregulation plan for his booming Southern state, the sky-high prices and rolling blackouts a continent away have been "horrifying."
Determined not to make the same miscalculations as California did with its discredited deregulation scheme, Hoyle's committee decided two weeks ago to put its plan on hold--indefinitely.
North Carolina was in the early stages of crafting its plan to introduce competition into its electricity market. But even some states where the plans have been signed into law and were soon to take effect have put on the brakes.
Nevada Gov. Kenny Guinn has delayed his state's plan for the second time. Retail competition had been scheduled to start in September.
"We must learn from the mistakes of California, so that we never repeat them here," he said in his State of the State address last month. "I cannot and will not support deregulation until I am assured that power supplies are secure and those who would be hardest hit by rate increases are protected."
In New Mexico, the chief sponsor of that state's deregulation bill, which was signed into law more than a year ago, is busy trying to persuade the state Senate to delay implementation until at least 2007.
"The people of New Mexico should not be exposed to the risks of the marketplace that California ratepayers are now experiencing," state Sen. Michael S. Sanchez said in a statement.
States began adopting plans to open their electrical generating markets to competition in response to 1992 congressional legislation authorizing an open wholesale market. According to the Department of Energy, in addition to the states that have already deregulated through legislative or regulatory action, two more have legislation pending, and 16 were actively investigating deregulation until California's crisis unfolded. Only eight states--Idaho, South Dakota, Nebraska, Kansas, Tennessee, Alabama, Georgia and Hawaii--have resisted the trend.
Among those states whose deregulation programs are proceeding, Texas is often cited as a potential model. Among other things, the state launched the process in 1995 by encouraging out-of-state companies to build power plants in Texas; 22 plants already have been added over the last five years.
California was near the head of the pack with its 1996 legislation. Although the plans differ from state to state, each restructuring plan offers power customers a choice of suppliers and attempts to prevent established utilities from using unfair tactics to dampen competition.
Some plans, including California's, encourage the development of alternative power sources.
In Arkansas, the governor and legislative leaders decided last week to postpone deregulation until October 2003 at the earliest.
"It will give us a chance to study why [deregulation] is working in other states or why [it is] not," said Jim Harris, spokesman for Arkansas Gov. Mike Huckabee. "We see the problems [California is] having. We want to see how it will play out before we implement here."
In Oklahoma, Atty. Gen. Drew Edmondson wrote each legislator a letter, which mentioned California's problems, and urged the lawmakers to delay implementing the state's 1997 restructuring law. The state Legislature meets this week, and several bills already have been introduced to delay competition in the retail electricity market.
Oklahoma's law calls for competition in the retail electricity market to start on July 1, 2002, but there appears to be a consensus for a delay.
Oklahoma's electricity rates are among the nation's lowest, and the state's attorney general is worried deregulation would change that.
"We want to ensure those low rates can be protected for the benefit of consumers in Oklahoma," said Cece Coleman, assistant attorney general in charge of the public utilities unit.
Edmondson is advocating that the state conduct an economic impact study and an infrastructure impact study to make sure that the state's power grid can handle the extra load of competitive suppliers.
Even in states where deregulation efforts appear to be going forward, some lawmakers are using the California crisis to try to halt deregulation.
U.S. Rep. Peter DeFazio (D-Ore.), for example, is trying to encourage his state's Legislature to drop its plan.
Public Citizen - Press Release - February 6, 2001
WASHINGTON, D.C. - California's plan to spend up to $10 billion to address the state's electricity crisis will take the state down a path of debt that is almost certain to lead to higher electricity bills, higher taxes or both, Public Citizen said today.
The plan, which was signed into law late last week, calls for the state to assume utilities' financial risks by spending up to $10 billion to buy electricity on their behalf. It essentially uses public money to pad the profits of profiteering corporations and relieves California's utilities of all market risk.
The state's better option is to buy tangible assets, such as power plants and transmission lines, so California can regain control over sky-high prices and unreliable supply. But the legislation forbids the state from using any taxpayer money to "take ownership of transmission, generation, or distribution assets."
"This bailout is a recipe for taxpayer indebtedness for many years to come," said Public Citizen President Joan Claybrook. "It's a boon for the energy industry and a crying shame for taxpayers. Without addressing the inflated wholesale electricity market, the state's taxpayers will be buying a go-cart for the price of a Porsche. The state ought to buy power plants and regain complete control over the electricity market."
The plan will be a $10 billion-dollar bust because it will simply hand taxpayer money over to a few out-of-state power plant owners. The state will receive nothing in return but wildly overpriced wholesale electricity, Claybrook said. Under the bailout plan, taxpayers ? not California's utilities ? will assume all the financial risk, and the more than $10 billion in expenditures won't guarantee lower wholesale prices.
The bill signed by Governor Davis, ABX1 1, immediately appropriates nearly $476 million in cash from the general fund and up to $10 billion in revenue bonds over the next two years to purchase wholesale electricity from the handful of corporations that own power plants in and around California. California's utilities will be paid by the state to handle billing and other services, but the state will bear all financial risk of collecting outstanding consumer bills and purchasing wholesale electricity from power plant owners.
The agreement does not require the utilities to sell electricity produced at their own hydroelectric and nuclear facilities to the state at cost. Instead, the utilities can sell their power at market prices and use the proceeds to pay off their "debt." The state will sell the power it purchases at cost to the state's consumers. Finally, the legislation forbids the state from using any taxpayer money to "take ownership of transmission, generation, or distribution assets."
The Fallacy of Long-Term Contracts in an Overpriced Market
But even the low end of the state's offer is a grossly inflated price, way above the cost of producing electricity (it is important to note that a week ago, the handful of power producers rejected a state offer to buy electricity at similar rates). The nearly $28 billion of electricity sold to California in 2000 was more than 276 percent higher than in 1999. Binding taxpayer money to purchase wildly overpriced electricity for many more years to come will only handcuff the state financially.
California need only look to the costly mistakes made through earlier over reliance on long-term energy contracts as a way to drive prices down. Expensive long-term contracts for renewable sources of energy were mandated by the federal government in 1986 and forced upon utilities by state regulators. Those contracts helped make California's consumer electricity rates among the highest in the nation ? something the 1996 deregulation law was supposed to address.
Taxpayers Will Have Nothing to Show, While Corporations Stand to Profit Even More
But because the bailout legislation expressly forbids the state from acquiring such assets, California's taxpayers will continue spending billions to pad the profits of a handful of out-of-state power plant owners. The seven major out-of-state power producers and power marketers posted $6.5 billion in after-tax profits in 2000.
"These companies have the money to address this situation," Claybrook said. "Unfortunately, they'd rather use taxpayer money to bail them out, and the California legislature is setting consumers up to do just that."
L. A. Times - February 5, 2001
California Gov. Gray Davis on Monday seized for the state lucrative, long-term energy contracts held by Pacific Gas & Electric that were about to be sold by the California Power Exchange, a creditor of the nearly bankrupt utility.
Davis' move comes three days after the Democrat took a similar action to block the power exchange from liquidating forward-market energy contracts held by cash-strapped utility Southern California Edison. The power exchange had sought to liquidate the contracts to recover hundreds of millions of dollars owed by the two utilities.
But the governor's office said the two orders were needed to "preserve" the contracts' value for consumers in the power-starved state hit by an energy crisis that has led to rolling blackouts and nearly bankrupted the two utilities.
"This will ensure that the price of power is a good deal less than it would be if it went out on the open market," Davis told a news conference. "Legislative leaders urged me to take this action and I took it."
The contracts, valued at hundreds of millions of dollars, deliver electricity at relatively inexpensive prices negotiated last year. These rates are far lower than on the chaotic spot market where the state's Department of Water is now paying an estimated $45 million a day in order to keep the lights on in the nation's most populous state.
A state court had issued a temporary restraining order blocking the exchange from selling the contracts to give Davis time to decide if the state would take them. Davis seized the contracts just before a Monday morning hearing on the restraining order.
Both Edison International's Southern California Edison and PG&E Corp.'s Pacific Gas & Electric are nearly bankrupt after racking up a combined $12 billion in debt buying power at high wholesale prices they are banned from passing on to consumers under the state's 1996 deregulation law.
That same deregulation legislation established the power exchange to buy and sell power for utilities. Southern California Edison and Pacific Gas & Electric were among the biggest buyers on the exchange.
Lawmakers are also racing to solve the power crisis roiling California. Last week Davis signed an estimated $10 billion energy rescue plan calling for the state to buy and sell power that its cash-strapped utilities can no longer afford.
Davis, under increasing pressure to solve the crisis, also said he would make public on Tuesday the first results of the state's efforts to buy long-term electricity contracts in a bid to stabilize the state's precarious power supply.
He added he would also unveil later this week a program to increase generation capacity. But he did not provide any specific details of the plan.
“I'm very grateful for the ability to enter into long-term contracts and as you'll see tomorrow, we have been successful at the beginning of that process," Davis told reporters.
Orange County Register - By Kent Pollock - February 4, 2001
Government and energy industry officials scrambling for a solution to California's energy debacle have been struck by the same malady that permeates the crisis itself: Secrecy.
Secret bidding. Secret deals. Secret restructuring. Secret negotiating. Secret information. Secret teleconferences. Secret federal approvals. Secret "gaming" and manipulation, the governor suspects.
Only the power brokers know for sure.
And now the public has been shut out of efforts under way to fix what has been referred to as one of the most costly public-policy mistakes ever made. Negotiations among government, industry and elected officials have been conducted mostly behind closed doors or within private teleconference meetings.
How many times must secrecy take its toll before government values public scrutiny?
The prevailing secrecy, coupled with the fast pace of the solution process, creates an atmosphere where mischief by power brokers can easily slip past unnoticed.
There aren't many issues more important to the public than having reliable and affordable electric service, yet there's been minimal public outrage that energy deregulation and efforts to cure its ill effects on California remain mostly shielded from public view.
Self-serving nuggets of information emerge from the closed-door debate over how to feasibly solve the problem, but precious little substance to build confidence that the administration and Legislature - the same institutions that got us into this mess - are formulating a solution beneficial to the ratepayers and taxpayers who will ultimately pay for the deregulation boondoggle.
Conservative estimates now put the rapidly rising bill well over $40 billion, not counting the government toll for reacting to the rolling blackouts that have left people stranded in elevators, injured in car accidents and exposed to general havoc in many California communities.
Early last month, PG&E's parent company quietly sought and obtained permission from federal regulators to restructure itself in a way that protects the gigantic corporation from responsibility for PG&E's growing debt. The restructuring was described in an obscure public notice as a stock transfer, but its potential impact on the sixth largest economy in the world is obvious.
Gov. Gray Davis was described by a spokesman as being "disappointed that the Federal Energy Regulatory Commission acted in the middle of the night without notice to all parties" affected by the restructuring. Although elected officials and government agencies have expressed frustration with the secrecy that shrouds the power industry, they have yet to realize that their own secrecy contributes to the problem.
Gov. Davis has criticized the secret bidding process through which power is purchased by utilities, yet he has refused press access and mostly excluded consumer groups from negotiations that will ultimately affect virtually every Californian.
"We've been unable to get information [from power brokers] despite numerous requests," gubernatorial press spokesman Steve Maviglio recently told the San Francisco Chronicle. "It begs the question: What are they hiding?" A good question that ratepayers and taxpayers could legitimately ask of Davis and other government negotiators secretly plotting a solution.
One marathon teleconference negotiating session lasted over seven hours and featured participation by federal regulatory officials, utility industry representatives, Gov. Davis, California Senate President John Burton, Assembly Republican leader Bill Campbell, Senate Republican leader Jim Brulte and Assembly Speaker Robert Hertzberg.
Neither consumer groups nor the media were allowed to listen in on the session.
Burton has been highly critical of the veil of secrecy that protects utility operations from public scrutiny while continuing to perpetuate the darkness by participating in the closed negotiations.
"I don't know what's confidential about it [the power purchasing process]," Sen. Burton said recently, adding that obtaining pricing information from power brokers would "tell you to what degree you're getting screwed."
Burton has introduced a spot bill to require power wholesalers operating in California to report on their activities, but the bill at this point has no details regarding what disclosure would be required or how it would be enforced. And there is a question whether federal regulations requiring confidentiality might trump state legislation.
The elected officials' frustrating attempts to obtain information have given them a taste of what everyday citizens experience when trying to obtain public information from local and state agencies. California's open government and public records laws have become so riddled with exceptions that they are dysfunctional and nearly useless.
A recent compliance audit of the California Public Records Act found that requests to local agencies and schools for clearly public records were initially denied 77 percent of the time. The audit, conducted by the California First Amendment Coalition and the Society for Professional Journalists, documented that citizens seeking information about how their government operates are routinely told it is none of their business.
Government attorneys routinely counsel public agencies to keep secrets in the name of deliberative process or labor negotiation or personnel privacy or policy negotiation. And the courts have for the most part validated the secrecy.
The San Jose Mercury News sued the two agencies that oversee wholesale electricity auctions and the power grid to force disclosure of information vital to scrutinizing whether price manipulation is occurring. But a Sacramento Superior Court ruled that neither agency is subject to the state's open government laws. No appeal was filed.
Any long-term solution to the deregulation crisis must include legislation requiring that all aspects of energy policy and sales be open to public scrutiny. Information about the cost of producing power and the process of selling it should be disclosed to the public despite industry protestations that sharing the information would somehow damage competition.
If the utility industry can make a case for confidentiality, there's plenty of precedent in the California Public Records Act to require delayed or retrospective public disclosure to protect time-sensitive proprietary information while ensuring that secret rate manipulation is not occurring. Such is the case with state health service contract negotiations, local hospital district records and certain welfare records.
But in the arena of energy deregulation, indications are that government-sanctioned secrecy has cloaked price manipulation and corporate exploitation of bad government policy. Lawmakers must help conquer this abuse by bringing the public into the equation.
The few times neutral observers have been allowed to look into the dark world of power negotiations they have found disturbing indicators of price manipulation.
Last August, after studying competition in California's wholesale electricity market between June 1998 and September 1999, researchers at the University of California Energy Institute in Berkeley reported finding $785 million "in excess of competitive levels" garnered by utilities during the 16-month period.
And a Public Utilities Commission analysis concluded that last summer alone California's utilities paid $4 billion more for electricity than they should have had to pay in a truly competitive market. The cost of wholesale electricity rose by 5,000 percent during one month not long ago.
A recent draft order by the Federal Energy Regulatory Commission determined that the boards of the two organizations that regulate power purchases by utilities should be reconfigured to remove the influence of stakeholders with a vested economic interest in the outcome of decisions, and legislation to that effect has been introduced.
But unfortunately, amendments slipped into the proposed legislation would allow the Electricity Oversight Board, which is empowered to reject appointments to the two boards that control wholesale power brokering - the Independent System Operators and California Power Exchange - to make the decisions in closed session. A separate bill by Sen. Debra Bowen would force all appointment decisions into the relatively open forums of senate hearings.
The governor should act by simply opening the entire process to the public and using technology to share information, ensuring public scrutiny of any forthcoming solution. Californians can now log onto the state's official Web site and watch elephant seals mate, or listen to hearings on ordinary bills in the Capitol, so why not provide Web-based audio and video of negotiations for an energy cure?
The quick and mostly hidden process of finding a solution to the energy crisis reminds some observers of the legislative process that put California on the road to energy deregulation failure in the first place.
Deregulation legislation passed in 1996 with little scrutiny by the public or even other legislators. Sen. Steve Peace summarized the devilish details of the complex law in a two-page executive summary for his colleagues' consideration before they voted quickly and unanimously in both houses to pass the legislation.
Current events indicate that we haven't learned from our mistakes. Some will say that concerns over secrecy are overstated since any deal will have to be approved by the Legislature in a very public process. But any lobbyist will tell you that a bill that arrives in a legislative hearing as a consensus piece is unlikely to prompt due deliberation or probing public examination.
When government turns over essential services like electricity to private companies, then it must at minimum require that brokering in the free market system be done in an open and accountable way. As things stand now, too much faith and trust are being sought by government and industry individuals with a demonstrated record of failure in the energy arena. How could opening a window on the process result in anything worse? It's an approach that's never been given the chance to fail.
As we have seen and experienced, the issue of secrecy in energy policy development has thus far left us, literally, in the dark.
L. A. Times - February 2, 2001
As cash-strapped utilities curtail campaign donations to California lawmakers, privately owned power producers appear ready to pick up at least some of the slack.
Four suppliers to California who have benefited handsomely from a nationwide surge in wholesale electricity and natural gas prices stepped up their giving to lawmakers and political campaigns last year, donating $455,000, according to campaign contribution reports.
Calpine Corp. of San Jose doled out just over $270,000, up from $28,000 in 1999.
"We're becoming a major player in California," said Bill Highlander, Calpine's director of public relations. "This means you get involved in some of these activities of supporting candidates."
The company gave $22,500 last year to Assembly Speaker Bob Hertzberg (D-Sherman Oaks) and $19,000 to Gov. Gray Davis, according to the reports.
Several out-of-state power companies--Dynegy Inc. of Houston, Duke Energy of Charlotte, N.C., and Reliant Energy of Houston--each contributed more than $50,000 to California campaigns last year, after donating less than $10,000 each in 1999.
Richard Wheatley, a spokesman for Reliant Energy, said it was only in 1998 that his company bought five power plants in California. And last year was an election year, he said.
A Duke Energy official cited similar reasons for his company's $77,000 in donations last year. Company officials spent the year getting to know lawmakers in the communities where they have projects, said spokesman Tom Williams. And they helped fund a November ballot measure that asked residents of Morro Bay if the City Council should support the replacement of an existing power plant owned by Duke.
"We were just kind of finding our bearings in the state," said Williams.
He said his company's interests in California have expanded from two power projects worth $700 million to three worth $1.6 billion.
"What we're doing is being involved members of the community where we have plants to bring on supplies that the state needs," Williams said.
Another company with a large stake in the California electricity market, the Houston energy marketer Enron Corp., gave $173,000 to California campaigns last year, compared with $158,000 in 1999.
Donations by PG&E Corp., the parent company of Pacific Gas & Electric Co., had already declined from roughly $1 million in the first half of 2000 to just under $300,000 in the latter half.
Edison International, parent of Southern California Edison, gave roughly $980,000 to state campaigns, with donations dipping modestly in the second half of the year.
The company spread more than $10,000 among three political action committees and more than $30,000 among 17 state lawmakers in December. It turned down $250,000 in new requests for contributions the same month. Edison officials say the money was committed to the recipients in October and November of last year.
Sempra Energy, the parent company of San Diego Gas & Electric, gave $500,000 to California politicians and campaigns in 2000.
Campaign reform advocate Tony Miller found the contributions unsurprising. He faulted the unrestricted California system that encourages those with something to gain to give money to politicians--if only to gain access to them. "It's difficult to expect [the lawmakers] not to accept them," Miller said of the gifts. "This is like a thirsty person shown some water. They're going to drink."
Jamie Court of the Santa Monica-based Foundation for Taxpayer and Consumer Rights was less sanguine. He alleged a quid pro quo between the power producers and the lawmakers who approved a $10-billion plan Thursday that allows the state to buy power and sell it to customers of Edison and PG&E for up to a decade.
"Basically, the increase in political spending bought the power producers that sweetheart deal," Court said.
Williams, of Duke Energy, said there was no connection between Thursday's vote and the contributions made by his company.
"There is no correlation to that at all," Williams said. "Decisions on contributions were made well before we entered into this crisis situation."
L. A. Times - February 1, 2001
Despite a state energy crisis and national elections, Gov. Gray Davis managed to raise $14.2 million in his second year in office, roughly $1 million more than he collected in his first year.
And campaign contribution records show that the parent company of Southern California Edison showered lawmakers with thousands of dollars in contributions in December--the same month the company announced it would eliminate hundreds of jobs and suspend quarterly dividend payments.
An Edison spokesman said the company was keeping commitments it had made in previous months to the lawmakers and noted that it turned down roughly $250,000 in requests made by lawmakers in December. The governor's campaign kitty is now bulging with $25.9 million, according to a campaign contribution report. The document shows that Davis raised $8.4 million during the first six months of last year and another $5.8 million during the latter half.
Garry South, the governor's chief campaign strategist, said Davis has not held a fund-raising event since mid-December, in part because of previous plans to hold a number of major events this spring but also because of the energy crisis.
"We have an economic and electricity problem that has pretty much consumed all of the governor's time," South said.
Campaign records show that Davis accepted a $10,000 contribution from Duke Energy, one of the major power generators that sell supplies to California.
South said that the fund-raising event where the money was raised was held last May--before the state became engulfed in its current crisis--and that the check was not received until August.
"I don't believe there was any discussion about returning that particular contribution," South said.
He added that Davis' fund-raising committee returned a $2,500 contribution about two weeks ago after it was determined that the money had come from the parent company of one of the independent power producers with which the state is negotiating for long-term electricity purchases.
"We sent it back," he said.
Davis accepted $15,000 in August and September from Edison International, the parent company of Southern California Edison. He received $10,000 from PG&E Corp., the parent company of Pacific Gas & Electric Co., on Oct. 30, which brought the amount the company contributed to Davis last year to $48,500. The October contribution by PG&E was accepted even as it became increasingly clear that the utility was headed for financial hard times because of the state's failed deregulation scheme.
"We didn't turn them away," South said.
In December, the month when Edison International announced cutbacks, it contributed a combined $27,000 to 15 lawmakers.
Tommy Ross, regional vice president for public affairs for Southern California Edison, said the money reported for December reflects commitments the company made last October and November.
"We cut off all new campaign contributions in the early part of December of last year," said Ross, who added that money given to lawmakers came from shareholders, not customers.
The December contributions made by Edison International include $2,500 to Los Angeles Assemblyman Rod Wright, a Democrat who heads the Assembly Utility and Commerce Committee and $1,500 to Assemblyman Fred Keeley, the Boulder Creek Democrat and speaker pro tempore who has introduced legislation that would allow California to buy electricity through long-term contracts with power plant owners.
Campaign contribution records show that PG&E Corp. made two donations totaling less than $2,500 in December. PG&E spokesman Ron Low said the company suspended political contributions in December as part of its cash conservation efforts.