Pull the Plug

It's time to pull the plug
Failure would serve the power
companies right and
consumers well, if regulation
followed


Sunday March 18, 2001

By Gregory Palast

CAMBRIDGE, England --

As the lights go out over California, state politicians are
in a Henny Penny panic that the two big local power
companies, Southern California Edison and Pacific Gas
& Electric., will collapse into bankruptcy. Not me: I
can't think of anything that would more joyously combine
historical justice and good public policy.

Why justice? Because SCE and PG&E executives, eager
to reap the profits of deregulation, were in the forefront of
the army of industry lobbyists fighting to establish the
system that got California into this mess.

And why good public policy? Because letting the utilities
go bankrupt could be the first step toward returning
California to the system of government price regulation
that has given the United States some of the cheapest
and most reliable electricity in the world. Regulation may
be politically unfashionable, but it works.

During the past three decades as a consultant to 19
state governments, I've seen electricity price regulation
from the inside. The US process is unique in the world.
In open hearings, consumer groups, competitors or
anyone off the street can pore over a utility company's
account books, cross examine the company's executives
and question the regulators staff. Based on that
evidence, public utility commissions set a price per
kilowatt hour based on verified cost plus a small, tightly
controlled profit for shareholders. It's a litigious messy
business, prone to political manipulation, just as it critics
say. But that's true of any democratic process.

The deregulation movement seeks to replace this open,
participatory, U.S. system - one that's been
astonishingly effective for nearly a century - with
something conceived and designed by Margaret
Thatcher's England and launched there in early 1990.. (Sorry
California, this is one fad you didn't think of first.) A
number of countries, including Brazil and Chile,
mimicked the British system. California swallowed it
whole.

This is how the British system works. Firts, electricity
businessses are split into "generators" and "distributors" -
the first owning the power plants, the second the wires
transmitting the power. Then something called a "power
pool" is established. Every day, generators bid the price
at which they will supply electricity to the pool at a certain
hour of the next day, say 2 cents per kilowatt hour at 4
p.m. In Britain, it didn't take long for the handful of power
sellers and traders to learn how to "game" the pool,
essentially turning the daily auction into a fixed casino.

So it's not surprising that in Britain - as well as in every
one of its imitators - the public has suffered higher
prices, delayed service and blackouts. In the 1990s, as
U.S. electricity prices fell with the price of oil, Britain's
stayed stratospheric, on an average 70 percent higher than
in the United States.

Manipulated or not, on a hot summer's day, when a pool
needs all the juice it can find, the handful of sellers can
name their price. In California, they do. For example, this
past June 29, sellers demanded 52 cents per kilowatt
hour, on June 29 1999, they accepted 5 cents, a price
better reflecting their true costs.

I first came to Britain in 1996, to help the incoming Labor
government try to fix the nation's new - but broken -
electricity market. It didn't work. Year after year, the fixes
failed, as they will fail in California and other states that
think they can design a deregulated system. There is no
fix: Free markets in electricity go berserk because they
aren't really markets, aren't free and can't be.

Market fundamentalists say the solution to half-baked
deregulation is full deregulation, with no rules at all.
That's frightening. No one in the United States is safe
from the deregulators.

If the problem is deregulation, the cure is regulation.
Those who profit from deregulation have fostered the
presumption that the process is irreversible. But regulate
we must and can.

In California, the first step would be to guide SCE and
PG&E into Chapter 11 bankruptcy. The state could then
purchase power lines and other assets. Shed no tears for
these two utilities. Today, they are sinking ubder a $12
billion debt to power sellers. But in the first four years
after deregulation, until the market turned on them (as
market do), the two operators stuffed their accounts with
$20 billion in windfall revenues.

Once the distribution grid is in public hands, California
must return the power plants within its borders to the old
profit limited, democratically organized method of
regulating price. But this rescue plan will fail unless the
federal government gives up on the deregulation fantasy
as well.

Pulling out of the deregulation morass is not a technical
problem but a political one. An economic ideology - not
to mention several trillion dollars of infrastructure - are
on the line. California's electricity grid may be the free
marketeers' Vietnam. It is the place where the conviction
that markets are superior to public control loses its way
in the dark. The only solution to the deregulation debacle
is swift, honorable and complete withdrawal.


California-born Gregory Palast is a consultant on utility
deregulation and a columnist with the Observer of
London.